<PAGE>
Rule 497(h) File Nos. 333-42364 and 811-4841
PROSPECTUS
$140,000,000
MFS MUNICIPAL INCOME TRUST
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED
("MUNICIPAL PREFERRED") SHARES
2,800 SHARES, SERIES T
2,800 SHARES, SERIES TH
LIQUIDATION PREFERENCE $25,000 PER SHARE
------------
MFS Municipal Income Trust (the "Trust") is selling 2,800 Series T and
2,800 Series TH Municipal Auction Rate Cumulative Preferred Shares ("Municipal
Preferred"). The Trust is a non-diversified, closed-end management investment
company that, as its investment objective, seeks to provide high current
income exempt from federal income taxes. The Trust seeks to achieve its
investment objective by investing primarily (i.e., at least 80% of its assets
under normal circumstances) in debt securities issued by or on behalf of
states, territories and possessions of the United States, and the District of
Columbia and their political subdivisions, agencies or instrumentalities, the
interest on which is exempt from federal income tax. Normally, at least 65% of
the Trust's assets will be invested in tax-exempt securities rated below the
three highest rating categories of recognized rating agencies. Tax-exempt
securities rated below the four highest categories of recognized agencies are
commonly known as "junk bonds." The Trust may invest up to 100% of its assets
in junk bonds.
(continued on next page)
INVESTING IN THE SHARES OF MUNICIPAL PREFERRED INVOLVES CERTAIN RISKS. SEE
THE "RISK FACTORS AND SPECIAL CONSIDERATIONS" SECTION BEGINNING ON PAGE 10 OF
THIS PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the issuance of these securities or
determined if this Prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
------------
PER SHARE TOTAL
Public Price ........................... $25,000 $140,000,000
Sales Load ............................. $ 250 $ 1,400,000
Proceeds to Trust (before expenses)* ... $24,750 $138,600,000
* Offering Expenses to be paid by the Trust are estimated to be $518,460.
The public offering price per share will be increased by the amount of
dividends, if any, that have accumulated from the date the shares of Municipal
Preferred are first issued.
The underwriter is offering the shares of Municipal Preferred subject to
various conditions. The underwriter expects to deliver the shares to
purchasers, in book-entry form through The Depository Trust Company, on or
about December 4, 2000.
------------
SALOMON SMITH BARNEY
December 4, 2000
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(continued from previous page)
Investors in Municipal Preferred shares will be entitled to receive cash
dividends at an annual rate that may vary for the successive dividend periods
for such shares. The dividend rate on the Series T Municipal Preferred shares
for the period from and including the date of issue to but excluding December
13, 2000 will be 4.30% per year. The dividend rate on the Series TH Municipal
Preferred shares for the period from and including the date of issue to but
excluding December 15, 2000 will be 4.30% per year. For each subsequent period
for a series, the auction agent will determine the dividend rate for a
particular period by an auction conducted on the business day prior to that
period. Investors in shares of Municipal Preferred may participate in auctions
through their broker-dealers in accordance with the procedures specified
herein. The Trust may redeem shares of Municipal Preferred as described under
"Description of Municipal Preferred -- Redemption."
This Prospectus sets forth concisely the information about the Trust that a
prospective investor should know before investing, including information about
risks. You should read this Prospectus before you invest and keep it for future
reference. The Trust's Statement of Additional Information, dated December 4,
2000, has been filed with the Securities and Exchange Commission and contains
additional information about the Trust and is incorporated by reference into
(which means it is considered to be a part of) this Prospectus. You may obtain a
free copy by calling Massachusetts Financial Services Company at 1-800-637-2304.
See page B-1 of this Prospectus for a table of contents of the Statement of
Additional Information.
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. THE TRUST HAS NOT, AND THE UNDERWRITER HAS NOT,
AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF
ANYONE PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT
RELY ON IT. THE TRUST IS NOT, AND THE UNDERWRITER IS NOT, MAKING AN OFFER TO
SELL THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT
PERMITTED. YOU SHOULD ASSUME THAT THE INFORMATION APPEARING IN THIS PROSPECTUS
IS ACCURATE AS OF THE DATE ON THE FRONT COVER OF THIS PROSPECTUS ONLY. THE
TRUST'S BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY
HAVE CHANGED SINCE THAT DATE.
TABLE OF CONTENTS
PAGE
Prospectus Summary ................................................... 4
Risk Factors and Special Considerations .............................. 10
Financial Highlights ................................................. 12
The Trust ............................................................ 12
Use of Proceeds ...................................................... 12
Capitalization At April 30, 2000 ..................................... 13
Portfolio Composition ................................................ 13
Investment Objective and Policies .................................... 13
Management of the Trust .............................................. 14
The Auction .......................................................... 15
Determination of Net Asset Value ..................................... 17
Description of Municipal Preferred ................................... 17
Rating Agency Guidelines ............................................. 23
Description of Common Shares ......................................... 24
Certain Provisions in the Declaration of Trust ....................... 24
Repurchase of Common Shares; Conversion to Open-end Fund ............. 25
Tax Matters .......................................................... 26
Custodian, Auction Agent, Transfer Agent, Dividend Disbursing Agent
and Registrar ...................................................... 27
Underwriting ......................................................... 28
Legal Opinions ....................................................... 28
Reports to Shareholders .............................................. 28
Experts .............................................................. 28
Further Information .................................................. 28
Glossary ............................................................. 29
Appendix A -- Investment Techniques and Practices .................... A-1
Table of Contents of Statement of Additional Information ............. B-1
<PAGE>
PROSPECTUS SUMMARY
This summary highlights some information from this Prospectus. It may not
contain all of the information that is important to you. To understand the
offering of the Municipal Preferred shares fully, you should read the entire
Prospectus carefully, including the risk factors. You should also refer to the
Glossary, which defines certain terms used in this Prospectus. This summary is
qualified in its entirety by reference to the detailed information included in
this Prospectus and the Statement of Additional Information.
THE OFFERING .......... MFS Municipal Income Trust (the "Trust") is offering a
total of 2,800 shares of Series T and 2,800 shares of
Series TH Municipal Preferred at a purchase price of
$25,000 per share plus dividends, if any, that have
accumulated from the date the Trust first issues the
shares. Except as described in this Prospectus, the
two series have the same rights and preferences and
are offered on the same terms. The two offerings,
however, are independent of each other, and one
offering is not contingent upon the closing of the
other offering. Certain information presented in this
Prospectus assumes that each offering is made and
effected as contemplated, but there can be no
assurance that this will be the case. Salomon Smith
Barney Inc. is offering the shares as underwriter.
The Municipal Preferred shares of each series will
be preferred shares of the Trust that entitle their
holders to receive cash dividends at an annual rate
that may vary for the successive dividend periods
for that series. Except as described under "--
Dividends and Dividend Periods" and "Description of
the Municipal Preferred -- Dividends and Dividend
Periods," each dividend period for each series will
be seven days. An auction agent will determine the
dividend rate for each series for a particular
period by an auction conducted on the business day
immediately prior to the start of that dividend
period for that series.
Investors and potential investors in the Municipal
Preferred shares of each series may participate in
auctions for the Municipal Preferred shares through
their broker-dealers.
Generally, investors in Municipal Preferred shares
will not receive certificates representing ownership
of their shares. The securities depository (The
Depository Trust Company or any successor) or its
nominee for the account of the investor's agent
member (generally the investor's broker-dealer) will
maintain record ownership of the Municipal Preferred
shares of each series in book-entry form. An
investor's agent member, in turn, will maintain
records of that investor's beneficial ownership of
Municipal Preferred shares.
THE TRUST .............. The Trust is a closed-end, non-diversified management
investment company. See "The Trust." The Trust was
organized as a Massachusetts business trust on
September 18, 1986 and has registered under the
Investment Company Act of 1940, as amended. The
Trust's common shares of beneficial interest are
traded on the New York Stock Exchange under the symbol
"MFM."
RISK FACTORS SUMMARY .. Risk is inherent in all investing. Therefore, before
investing you should consider certain risks carefully
when you invest in the Trust.
The primary risks of investing in Municipal Preferred
shares are the following:
o if an auction of a series fails you may not be able
to sell some or all of your shares of that series;
o because of the nature of the market for Municipal
Preferred shares, you may receive less than the
price you paid for your shares if you sell them
outside of the auction, especially when market
interest rates are rising;
o a rating agency could downgrade Municipal Preferred
shares, which could affect liquidity;
o the Trust may be forced to redeem your shares to
meet regulatory or rating agency requirements or may
voluntarily redeem your shares in certain
circumstances;
o in extraordinary circumstances the Trust may not
earn sufficient income from its investments to pay
dividends;
o if long-term rates rise, the value of the Trust's
investment portfolio may decline, reducing the asset
coverage for the Municipal Preferred shares;
o if an issuer of a municipal bond in which the Trust
invests defaults, there may be a negative impact on
the income and asset value of the Trust's portfolio
(the effects of this risk may, however, be mitigated
by the Trust's investment in municipal bonds covered
by insurance);
o because the Trust may invest a higher percentage of
its assets in a small number of issuers, the Trust
is more susceptible to any single economic,
political or regulatory event affecting those
issuers than is a diversified fund;
o junk bonds are subject to a substantially higher
degree of credit risk than higher rated bonds;
during recessions, a high percentage of issuers of
junk bonds may default on payments of principal and
interest; the price of a junk bond may therefore
fluctuate drastically due to bad news about the
issuer or the economy in general; and
o during recessions and periods of broad market
declines, junk bonds could become less liquid,
meaning that they will be harder to value or sell at
a fair price.
For additional risks of investing in the Municipal
Preferred shares of the Trust, see "Risk Factors and
Special Considerations" below.
DIVIDENDS AND
DIVIDEND PERIODS ...... Dividends on each series of Municipal Preferred shares
are cumulative from the date the shares are first
issued. The Trust will pay dividends on the shares of
Municipal Preferred, out of legally available funds
and when declared by the Board of Trustees, beginning
on December 13, 2000 for Series T and December 15,
2000 for Series TH.
After the initial dividend period, each dividend
period for each series of the Municipal Preferred
shares will generally consist of seven days; provided,
however, that before any auction for a series, the
Trust may decide, subject to certain limitations and
only if it gives certain notices, to declare a Special
Rate Period of up to five years. The Trust may declare
a Special Rate Period if, for example, it expects that
short-term rates may increase or market conditions
otherwise change, in an effort to optimize the effect
of the Trust's leverage on common shareholders. In the
case of dividend periods that are not Special Rate
Periods, dividends generally will be payable on each
succeeding Wednesday for Series T and Friday for
Series TH Municipal Preferred shares. The Trust may
specify different dividend payment dates for certain
Special Rate Periods.
The Trust will pay dividends through the securities
depository (The Depository Trust Company) on each
dividend payment date for each series.
The dividend rate on the Series T Municipal
Preferred for the period from and including the date
of issue to but excluding December 13, 2000 will be
4.30% per year. The dividend rate on the Series TH
Municipal Preferred for the period from and including
the date of issue to but excluding December 15, 2000
will be 4.30% per year. For each subsequent dividend
period for a series, the auction agent (Bankers Trust
Company) will determine the dividend rate on the
shares of Municipal Preferred through an auction for
that series.
MAXIMUM DIVIDEND RATE .. Generally, the rate at which the Trust pays dividends
on shares of a series of Municipal Preferred may not
exceed the maximum dividend rate. The maximum dividend
rate may vary for different dividend periods. It is
determined by the current credit rating assigned to
the shares of Municipal Preferred and an independent
reference rate (as discussed under "Description of
Municipal Preferred -- Dividends and Dividend Periods"
on page 18 herein) that may vary over time.
If the number of shares of a series of Municipal
Preferred available during an auction exceeds the
total number of shares of such series subject to
bids for that auction at less than or equal to the
maximum dividend rate for such series, then the
dividend rate for the subsequent dividend period for
that series will be the maximum dividend rate. In
addition, if the Trust fails to pay a dividend on
shares of a series of Municipal Preferred, or if the
Trust fails to pay the full redemption price for
shares of a series of Municipal Preferred when due,
then the dividend rate for the subsequent dividend
period for that series will be the maximum dividend
rate. If, however, the Trust cures its failure to
pay a dividend or to pay the full redemption price,
then the maximum dividend rate will not apply.
ASSET MAINTENANCE ..... Under the Statement creating the Municipal Preferred
shares of the Trust, which establishes and fixes the
rights and preferences of the shares of Municipal
Preferred, the Trust must maintain:
o asset coverage of the Municipal Preferred shares as
required by the rating agency or agencies rating the
Municipal Preferred shares, and
o asset coverage of the Municipal Preferred shares of
at least 200% as required by the Investment Company
Act of 1940.
Based on the composition of the Trust's portfolio and
market conditions as of October 31, 2000, the asset
coverage of the Municipal Preferred shares as measured
pursuant to the Investment Company Act of 1940 would
be approximately 317% if the Trust were to issue all
Municipal Preferred shares of both series offered in
this Prospectus, representing approximately 32% of the
Trust's capital.
MANDATORY REDEMPTION .. If the Trust does not maintain its required asset
coverage, it must redeem shares of each series of
Municipal Preferred at $25,000 per share plus any
dividends that accumulate and remain unpaid up to the
date fixed for redemption. The Trustwill limit
redemption to the number of Municipal Preferred
shares, together with all other preferred shares of
the Trust (if any), necessary to restore the required
asset coverage. As of the date of this offering, there
are no other preferred shares outstanding. The Trust
may avoid mandatory redemption by restoring its
required asset coverage pursuant to rating agency
guidelines. The provisions of the Investment Company
Act of 1940 may restrict the Trust's ability to make a
mandatory redemption in connection with a failure to
comply with the rating agencies' asset coverage
requirements.
OPTIONAL REDEMPTION ... The Trust, at its option and subject to certain
conditions, may choose to redeem all or a portion of
the shares of Municipal Preferred of each series
generally on the second business day preceding any
dividend payment date at the price of $25,000 per
share plus accumulated but unpaid dividends, if any,
whether or not earned or declared to (but not
including) the date fixed for redemption, and, during
certain Special Rate Periods, any applicable premium.
LIQUIDATION PREFERENCE The liquidation preference (that is, the amount the
Trust must pay to Municipal Preferred shareholders if
the Trust is liquidated) for shares of each series of
Municipal Preferred will be $25,000 per share plus
accumulated but unpaid dividends, if any, whether or
not earned or declared.
VOTING RIGHTS ......... The Investment Company Act of 1940 requires that the
holders of both series of Municipal Preferred shares,
and the holders of any other preferred shares of the
Trust, voting as a separate class, have the right to:
o elect at least two trustees at all times, and
o elect a majority of the trustees at any time when
dividends on the Municipal Preferred shares, or any
other preferred shares of the Trust, are unpaid for
two full years.
In each case, the holders of common shares, both
series of Municipal Preferred shares, and any other
preferred shares of the Trust, voting together as a
single class, will elect the remaining trustees. The
holders of each series of Municipal Preferred shares,
and the holders of any other preferred shares of the
Trust, will vote as a separate class or classes on
certain other matters as required under the Trust's
Declaration of Trust, the Investment Company Act of
1940, and Massachusetts law. Each common share, each
Municipal Preferred share, and each share of any other
class of preferred shares of the Trust is entitled to
one vote per share.
TAXATION .............. In general, dividends on shares of Municipal Preferred
will be exempt from regular federal income tax in the
hands of owners of such shares to the extent such
dividends are paid from tax-exempt income earned on
the Trust's investments. Exempt-interest dividends
paid by the Trust from interest earned on certain
private activity bonds may increase a corporate
shareholder's alternative minimum tax liability, and
all exempt-interest dividends may increase a corporate
shareholder's alternative minimum tax liability. The
extent of any such increase will depend on the
shareholder's particular tax situation. The Trust is
currently required to allocate net capital gain, net
tax-exempt income and other income taxable for federal
income tax purposes, if any, proportionately between
common shares of beneficial interest and shares of
Municipal Preferred. The Trust shall, in the case of a
seven-day dividend period or a Special Rate Period of
28 days or fewer for the shares of Municipal
Preferred, and may, in the case of any other Special
Rate Period for such shares, give notice of the amount
of any income taxable for federal income tax purposes
to be included in a dividend on shares of Municipal
Preferred in advance of the related auction.
Alternatively, if the Trust does not give such advance
notice, it generally will be required to pay such
dividend, increased by a Gross-Up Payment, to holders
of shares of Municipal Preferred. The amount of
taxable income allocable to shares of Municipal
Preferred will depend upon the amount of such income
realized by the Trust, but is not generally expected
to be significant.
INVESTMENT OBJECTIVE .. The Trust's investment objective is to provide high
current income exempt from federal income taxes. There
can be no assurance that the Trust will achieve its
investment objective.
INVESTMENT STRATEGIES . The Trust is a non-diversified mutual fund. This means
that the Trust may invest a relatively high percentage
of its assets in a small number of issuers. The Trust
also may invest a high percentage of its assets in
securities of issuers located in the same state, that
derive income from similar projects and that are
otherwise related.
The Trust invests, under normal market conditions, at
least 80% of its total assets in municipal securities
and participation interests in municipal securities
issued by banks, the interest on which is exempt from
federal income tax. Municipal securities are bonds or
other debt obligations of a U.S. state or political
subdivision, such as a county, city, town, village, or
authority. Participation interests in municipal
securities are interests in holdings of municipal
obligations backed by a letter of credit or guarantee
from the issuing bank. The Trust seeks to invest in
municipal securities whose income is exempt from
federal income taxes. However, the interest income on
certain of these municipal securities may be subject
to an alternative minimum tax. Under normal
circumstances, the Trust will invest at least 65% of
its assets in tax exempt securities rated below the
three highest rating categories of recognized rating
agencies. Tax-exempt securities rated below the four
highest categories of recognized agencies are commonly
known as "junk bonds." The Trust may invest up to 100%
of its assets in junk bonds.
The Trust may temporarily invest either in tax-exempt
securities in the higher rating categories of
recognized rating agencies or in cash or cash
equivalent short-term obligations of similar quality,
including, but not limited to, short-term municipal
obligations, certificates of deposit, commercial
paper, short-term notes, obligations issued or
guaranteed by the U.S. Government, its agencies,
authorities or instrumentalities and repurchase
agreements. Interest on certain of these short-term
obligations will be subject to federal income tax.
INVESTMENT ADVISER .... Massachusetts Financial Services Company ("MFS" or the
"Adviser"), an investment adviser registered under the
Investment Advisers Act of 1940, as amended, has
served as the Trust's investment adviser since the
Trust's inception.
RATINGS ............... The Trust will not issue shares of Municipal Preferred
unless such shares have a rating of Aaa from Moody's
Investors Service, Inc. ("Moody's") and AAA from
Standard & Poor's Ratings Group ("Standard & Poor's").
SECONDARY MARKET TRADING Broker-dealers may, but are not obligated to, maintain
a secondary market in shares of each series of
Municipal Preferred outside of auctions. There can be
no assurance that a secondary market will develop or,
if it does develop, that it will provide owners with
liquidity of investment. Shares of each series of
Municipal Preferred may be transferred outside of
auctions only to a broker-dealer or such other persons
who may be permitted by the Trust.
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
You should consider the following risk factors and other special
considerations in deciding whether to invest in shares of Municipal Preferred.
Please note that there are many circumstances which could cause the value of
your investment in the Municipal Preferred to decline, and which could prevent
the Trust from achieving its objective, that are not described here.
MUNICIPAL SECURITIES RISK.
o INTEREST RATE RISK. As with any fixed income security, the prices of municipal
securities in the Trust's portfolio will generally fall when interest rates
rise. Conversely, when interest rates fall, the prices of municipal securities
in the Trust's portfolio will generally rise.
o MATURITY RISK. The Trust may invest in municipal securities of any maturity.
Interest rate risk will generally affect the price of a municipal security
more if the security has a longer maturity. Municipal securities with longer
maturities will therefore be more volatile than other fixed income securities
with shorter maturities. Conversely, municipal securities with shorter
maturities will be less volatile but generally provide lower returns than
municipal securities with longer maturities. The average maturity of the
Trust's municipal security investments may affect the volatility of the
Trust's share price.
o CREDIT RISK. Credit risk is the risk that the issuer of a municipal security
will not be able to pay principal and interest when due. Rating agencies
assign credit ratings to certain municipal securities to indicate their credit
risk. The price of a municipal security will generally fall if the issuer
defaults on its obligation to pay principal or interest, the rating agencies
downgrade the issuer's credit rating or other news affects the market's
perception of the issuer's credit risk. A participation interest is also
subject to the risk of default by the issuing bank.
o CALL RISK. The issuers of municipal securities held by the Trust may call, or
prepay principal due on, their securities, particularly during periods of
declining interest rates. The Trust may not be able to reinvest that principal
at attractive rates, reducing income to the Trust. The Trust also may lose the
premium paid for the securities.
o GENERAL OBLIGATIONS AND REVENUE OBLIGATIONS RISK. The Trust may invest in
municipal bonds that are general obligations backed by the full faith and
credit of the municipal issuer. The Trust may also invest in municipal bonds
called revenue obligations which are subject to a higher degree of credit risk
than general obligations. Generally, the Trust primarily invests in revenue
obligations. Revenue obligations finance specific projects, such as building a
hospital, and are not backed by the full faith and credit of the municipal
issuer. Because revenue obligations are repaid from the revenues from a
facility, they are subject to a risk of default in payments of principal and
interest if the facility does not generate enough income.
LIQUIDITY RISK. The fixed income securities purchased by the Trust may be traded
in the over-the-counter market rather than on an organized exchange and are
subject to liquidity risk. This means that they may be harder to purchase or
sell at a fair price. The inability to purchase or sell these fixed income
securities at a fair price could have a negative impact on the Trust's
performance.
LOWER RATED MUNICIPAL SECURITIES RISK.
o HIGHER CREDIT RISK. Junk bonds are subject to a substantially higher degree of
credit risk than higher rated bonds. During recessions, a high percentage of
issuers of junk bonds may default on payments of principal and interest. The
likelihood of these issuers declaring or being placed into bankruptcy may be
higher relative to issuers of investment grade securities. The price of a junk
bond may therefore fluctuate drastically due to bad news about the issuer or
the economy in general. Municipal securities in the lower rating categories
and comparable unrated bonds are deemed to be predominantly speculative in
character.
o HIGHER LIQUIDITY RISK. During recessions and periods of broad market declines,
junk bonds could become less liquid, meaning that they will be harder to value
or sell at a fair price.
NON-DIVERSIFIED STATUS RISK. Because the Trust may invest a higher percentage of
its assets in a small number of issuers, the Trust is more susceptible to any
single economic, political or regulatory event affecting those issuers than is a
diversified fund.
AUCTION RISK. Shareholders may not be able to sell a series of Municipal
Preferred shares at an auction if the auction fails; that is, if there are more
Municipal Preferred shares of that series offered for sale than there are buyers
for those shares. The Trust believes this event is unlikely. Also, if a
shareholder places hold orders (orders to retain Municipal Preferred shares) at
an auction only at a specified rate, and that bid rate exceeds the rate set at
the auction, such shareholder will not retain his or her Municipal Preferred
shares. Finally, if a shareholder buys shares or elects to retain shares without
specifying a rate below which he or she would not wish to continue to hold those
shares, and the auction sets a below-market rate, such shareholder may receive a
lower rate of return on his or her shares than the market rate. See "Description
of Municipal Preferred" and "The Auction -- Auction Procedures."
ANTITAKEOVER PROVISIONS. The Trust's Declaration of Trust includes provisions
that could limit the ability of other entities or persons to acquire control of
the Trust or to change the composition of its Board of Trustees. Such provisions
could discourage a third party from seeking to obtain control of the Trust.
INVESTMENT CONSIDERATIONS. Investors in the shares of Municipal Preferred
should consider the following factors:
o The credit ratings of the shares of Municipal Preferred could be reduced while
an investor holds such shares.
o Neither broker-dealers nor the Trust are obligated to purchase shares of the
Municipal Preferred in an auction or otherwise nor is the Trust required to
redeem shares of the Municipal Preferred in the event of a failed auction.
o If sufficient bids do not exist in an auction, the applicable dividend rate
will be the maximum applicable dividend rate, and in such event, owners of the
shares of Municipal Preferred wishing to sell will not be able to sell all,
and may not be able to sell any, of such shares in the auction. As a result,
investors may not have liquidity of investment.
SECONDARY MARKET. The broker-dealers intend to maintain a secondary trading
market in the shares of each series of Municipal Preferred outside of auctions;
however, they have no obligation to do so and there can be no assurance that a
secondary market for either series of the shares of the Municipal Preferred will
develop or, if one does develop, that it will provide holders with a liquid
trading market. The shares of each series of Municipal Preferred will not be
registered on any stock exchange or on any automated quotation system. An
increase in the level of interest rates likely will have an adverse effect on
the secondary market price of the shares of Municipal Preferred, and a selling
shareholder may have to sell Municipal Preferred between auctions at a price per
share of less than $25,000. You may transfer shares outside of auctions only to
broker-dealers or such other persons as may be permitted by the Trust.
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth certain specified information for a common
share of beneficial interest of the Trust outstanding throughout each period
presented. The financial highlights for the period ended October 31, 1999 have
been audited by Deloitte & Touche LLP, the Trust's independent accountants,
whose unqualified report for the period ended October 31, 1999 is included in
the Trust's October 31, 1999 Annual Report and in "Report of Independent
Accountants" in the "Financial Statements" section of the Statement of
Additional Information. The financial highlights for the six month period
ended April 30, 2000 are unaudited. The financial highlights should be read in
conjunction with the financial statements and notes thereto included in
"Financial Statements" in the Statement of Additional Information.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
SIX MONTHS ENDED ----------------------------------------------------------------------------
APRIL 30, 2000 1999 1998 1997 1996 1995
(UNAUDITED)
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value - beginning of
period $ 7.96 $ 8.55 $ 8.51 $ 8.58 $ 8.84 $ 8.73
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.26 $ 0.54 $ 0.57 $ 0.61 $ 0.66 $ 0.68
Net realized and unrealized
gain (loss) on investments (0.23) (0.60) 0.05 (0.03) (0.26) 0.13
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.03 $(0.06) $ 0.62 $ 0.58 $ 0.40 $ 0.81
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders from net
investment income $(0.26) $(0.53) $(0.58) $(0.65) $(0.66) $(0.70)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 7.73 $ 7.96 $ 8.55 $ 8.51 $ 8.58 $ 8.84
------ ------ ------ ------ ------ ------
Per share market value - end of
period $ 6.94 $ 7.13 $ 9.19 $ 9.06 $ 9.38 $ 9.50
------ ------ ------ ------ ------ ------
Total return 0.84%++ (0.59)% 8.37% 3.90% 4.50% 12.57%
RATIOS (TO AVERAGE NET ASSETS)/
SUPPLEMENTAL DATA:
Expenses## 1.08%+ 1.06% 1.10% 1.19% 1.24% 1.33%
Net investment income 6.79%+ 6.49% 6.62% 7.26% 7.47% 7.66%
PORTFOLIO TURNOVER 10% 15% 12% 21% 13% 14%
NET ASSETS AT END OF PERIOD
(000 OMITTED) $303,230 $312,195 $333,544 $329,282 $328,630 $334,985
--------
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
</TABLE>
THE TRUST
The Trust is a closed-end, non-diversified management investment company.
The Trust's investment objective is to provide high current income exempt from
federal income taxes. The bonds and notes purchased by the Trust generally are
issued by or on behalf of states, territories and possessions of the United
States, and the District of Columbia and their political subdivisions, agencies
or instrumentalities, the interest on which is exempt from federal income tax
("Municipal Bonds" or "tax-exempt securities"). See "Investment Objective and
Policies." No assurance can be given that the Trust's investment objective will
be achieved. All or a portion of the Trust's dividends may be subject to the
Federal alternative minimum tax. The Trust was organized as a Massachusetts
business trust under the laws of the Commonwealth of Massachusetts on September
18, 1986, and is registered under the Investment Company Act of 1940, as amended
(the "1940 Act"). In November 1986, the Trust issued 31,011,802 shares of
beneficial interest, no par value (the "Common Shares"), pursuant to the initial
public offering thereof and commenced operations. The Trust's Common Shares are
traded on the New York Stock Exchange under the symbol "MFM." The Trust's
principal office is located at 500 Boylston Street, Boston, MA 02116, and its
telephone number is (617) 954-5000.
USE OF PROCEEDS
The net proceeds of this offering will be approximately $138,081,540, after
payment of the sales load to Salomon Smith Barney Inc. (the "Underwriter") and
estimated offering costs.
The net proceeds of the offering will be invested in accordance with the
Trust's investment objective and policies. It is presently anticipated that the
Trust will be able to invest substantially all of the net proceeds in Municipal
Obligations that meet the Trust's investment objective at or shortly (within six
to eight weeks) after the completion of the offering. To the extent that all of
the proceeds cannot be so invested, pending such investment, the Trust will
invest such proceeds initially in high-quality, short-term tax-exempt
securities, the income on which will be exempt from federal income taxes (other
than the possible incidence of any alternative minimum tax), or in high-quality
Municipal Obligations with relatively low volatility (such as pre-refunded and
intermediate-term securities), to the extent such securities are available. If
necessary to invest fully the net proceeds of the offerings immediately, the
Trust may also purchase, as temporary investments, short-term taxable
investments of the type described under "Investment Objective and Policies," the
income on which is subject to federal income taxes.
CAPITALIZATION AT APRIL 30, 2000
The following table sets forth the unaudited capitalization of the Trust at
April 30, 2000 and as adjusted to give effect to the issuance of the shares of
Series T and Series TH Municipal Preferred offered hereby (including estimated
offering expenses and sales loads of $1,918,460).
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
------------ ------------
<S> <C> <C>
Shareholders' Equity:
Preferred Shares, no par value per share; unlimited shares
authorized (no shares issued; 5,600 shares of Municipal
Auction Rate Cumulative Preferred Shares issued, as
adjusted, at $25,000 per share liquidation preference) . $ -- $140,000,000
Common Shares, no par value per share; unlimited shares
authorized; 39,297,340 less 55,500 treasury shares ..... 355,603,287 353,684,827
Accumulated undistributed net investment income .......... 1,038,188 1,038,188
Accumulated net realized loss on investments ............. (6,919,649) (6,919,649)
Unrealized depreciation on investments ................... (46,491,950) (46,491,950)
------------ ------------
Net Assets ................................................. $303,229,876 $441,311,416
============ ============
</TABLE>
PORTFOLIO COMPOSITION
As of April 30, 2000, approximately 99% of the market value of the Trust's
portfolio was invested in long and intermediate-term Municipal Obligations and
approximately 1% of the market value of the Trust's portfolio was invested in
short-term securities. For purposes of the foregoing sentence, futures
contracts in which the Trust has invested are not included in the market value
of the Trust's portfolio. The following table sets forth certain information
with respect to the composition of the Trust's investment portfolio (excluding
short-term securities) as of April 30, 2000.
<TABLE>
<CAPTION>
STANDARD & NUMBER MARKET NUMBER MARKET
POOR'S* OF ISSUES VALUE PERCENT MOODY'S* OF ISSUES VALUE PERCENT
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
AAA 28 $ 52,694,199.27 17.4% Aaa 24 $ 42,535,819.95 14.0%
AA 7 9,801,500.08 3.2 Aa 9 13,652,447.32 4.5
A 9 13,873,447.66 4.6 A 3 2,890,122.79 1.0
BBB 31 44,507,212.81 14.7 Baa 25 42,976,466.90 14.2
BB 9 9,729,799.27 3.2 Ba 14 18,048,986.11 6.0
B 6 8,676,648.29 2.9 B 1 706,039.39 0.2
NR** 121 163,818,067.10 54.0 NR** 135 182,290,992.02 60.1
--- --------------- ----- --- -------------- -----
Total 211 $303,100,874.47 100.0% Total 211 303,100,874.47 100.0%
=== =============== ===== === ============== =====
------
* Standard & Poor's rating categories may be modified further by a plus (+) or minus (-) in AA, A, BBB, BB and B ratings.
Moody's rating categories may be modified further by a 1, 2 or 3 in Aa, A, Baa, Ba and B ratings.
** Many bonds are rated by only one rating agency, which results in a higher percentage of bonds in this category. The total
market value of bonds that do not carry a rating from any rating service is $144,348,744.19, which represents 47.6% of the
market value of the Trust's portfolio (excluding short-term securities and futures) as of April 30, 2000.
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
The Trust's investment objective is to provide high current income exempt
from federal income taxes.
The Trust is a non-diversified mutual fund and invests, under normal market
conditions, at least 80% of its total assets in municipal securities and
participation interests in municipal securities issued by banks, the interest on
which is exempt from federal income tax. Municipal securities are bonds or other
debt obligations of a U.S. state or political subdivision, such as a county,
city, town, village, or authority. Participation interests in municipal
securities are interests in holdings of municipal obligations backed by a letter
of credit or guarantee from the issuing bank. The Trust seeks to invest in
municipal securities whose income is exempt from federal income taxes. However,
the interest income on certain of these municipal securities may be subject to
an alternative minimum tax. Under normal circumstances, the Trust will invest at
least 65% of its assets in tax-exempt securities rated below the three highest
rating categories of recognized rating agencies. Tax-exempt securities rated
below the four highest categories of recognized agencies are commonly known as
"junk bonds." The Trust may invest up to 100% of its assets in junk bonds.
In selecting fixed income investments for the Trust, MFS considers the views
of its large group of fixed income portfolio managers and research analysts.
This group periodically assesses the three-month total return outlook for
various segments of the fixed income markets. This three-month "horizon" outlook
is used by the portfolio manager(s) of MFS' fixed income oriented funds
(including the Trust) as a tool in making or adjusting a fund's asset
allocations to various segments of the fixed income markets. In assessing the
credit quality of fixed income securities, MFS does not rely solely on the
credit ratings assigned by credit rating agencies, but rather performs its own
independent credit analysis.
The Trust may temporarily invest either in tax-exempt securities in the
higher rating categories of recognized rating agencies or in cash or cash
equivalent short-term obligations of similar quality, including, but not limited
to, short-term municipal obligations, certificates of deposit, commercial paper,
short-term notes, obligations issued or guaranteed by the U.S. Government, its
agencies, authorities or instrumentalities and repurchase agreements. Interest
on certain of these short-term obligations will be subject to federal income
tax.
The Trust may invest in various types of securities and engage in various
investment techniques and practices which are not the principal focus of the
Trust and therefore are not described in this Prospectus. The types of
securities and investment techniques and practices in which the Trust may
engage, including the principal investment techniques and practices described
above, are identified in Appendix A to this Prospectus, and are discussed,
together with their risks, in the Trust's Statement of Additional Information.
The Trust may engage in active and frequent trading to achieve its
principal investment strategies. This may result in the realization and
distribution to shareholders of higher capital gains as compared to a Trust
with less active trading policies, which may increase your tax liability.
Frequent trading also increases transaction costs, which could detract from
the Trust's performance.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The Board of Trustees is responsible for the general supervision of the
Trust, including general supervision of the duties performed by the Adviser
under its Advisory Agreement (as defined below) with the Trust. There are 8
trustees of the Trust, 2 of whom are "interested persons" (as defined in the
1940 Act) of the Trust or the Adviser. The names and addresses of the trustees
and officers of the Trust and their principal occupations and other affiliations
during the past five years are set forth under "Management of the Trust" in the
Statement of Additional Information.
THE ADVISER
MFS. MFS, a Delaware corporation, is the Trust's Adviser. MFS and its
predecessor organizations have a history of money management dating from 1924,
thus making MFS America's oldest mutual fund organization. MFS is a subsidiary
of Sun Life of Canada (U.S.) Financial Services Holdings, Inc. ("Sun Life of
Canada (U.S.)") which in turn is an indirect wholly owned subsidiary of Sun Life
of Canada ("Sun Life"). Sun Life, is one of the largest international life
insurance companies and has been operating in the United States since 1895. The
executive officers of MFS report to the Chairman of Sun Life. The principal
business address of MFS is 500 Boylston Street, Boston, Massachusetts 02116.
PORTFOLIO MANAGER. Michael Roberge is a Senior Vice President of MFS. Mr.
Roberge has been the portfolio manager of the Trust since December, 1997 and has
been employed in the investment area of MFS since 1996. From 1994 to 1996, Mr.
Roberge worked as a municipal credit analyst and portfolio manager with Colonial
Investment Management.
ADVISORY AGREEMENT. The Investment Advisory Agreement between MFS and the Trust
(the "Advisory Agreement") provides that, subject to the direction of the Board
of Trustees of the Trust, MFS is responsible for the actual management of the
Trust's portfolio. The responsibility for making decisions to buy, sell or hold
a particular security rests with the Adviser, subject to review by the Board of
Trustees. The Adviser also provides certain administrative services and general
office facilities.
ADVISORY FEE. For the services provided by MFS under the Advisory Agreement, the
Trust pays it a fee computed and paid monthly in an amount equal to the sum of
0.4% of the average daily net assets of the Trust and 6.32% of the gross income
(i.e., income other than gains from the sale of securities or gains received
from futures contracts) of the Trust, in each case on an annualized basis, for
the Trust's then-current fiscal year. This advisory fee may be greater than that
paid by funds with similar investment objectives.
THE AUCTION
GENERAL
The provisions of the Statement creating the Municipal Preferred shares of
the Trust (the "Statement") provide that, except as otherwise described herein,
the Applicable Rate with respect to shares of Municipal Preferred for each Rate
Period after the Initial Rate Period thereof shall be equal to the rate per
annum that the Auction Agent advises has resulted on the Business Day preceding
the first day of such Subsequent Rate Period (an "Auction Date") from
implementation of the auction procedures (the "Auction Procedures") set forth in
the Statement and summarized below, in which persons determine to hold or offer
to sell or, based on dividend rates bid by them, offer to purchase or sell such
shares. Each periodic implementation of the Auction Procedures is referred to
herein as an "Auction."
Certain defined terms used in this section and under "Description of
Municipal Preferred" are defined in the Glossary.
AUCTION PROCEDURES
Prior to the Submission Deadline on each Auction Date for the shares of each
series of Municipal Preferred, each customer of a Broker-Dealer who is listed on
the records of that Broker-Dealer (or, if applicable, the Auction Agent) as a
holder of shares of Municipal Preferred (a "Beneficial Owner") may submit orders
("Orders") to that Broker-Dealer as follows:
o Hold Order -- indicating its desire to hold shares of Municipal Preferred
without regard to the Applicable Rate for the next Rate Period.
o Bid -- indicating its desire to sell shares of Municipal Preferred at
$25,000 per share if the Applicable Rate for the next Rate Period is less
than the rate specified in such Bid (also known as a hold-at-a-rate
order).
o Sell Order -- indicating its desire to sell shares of Municipal Preferred
at $25,000 per share without regard to the Applicable Rate for the next
Rate Period.
A Beneficial Owner may submit different types of Orders to its Broker-Dealer
with respect to shares of Municipal Preferred then held by such Beneficial
Owner. A Beneficial Owner that submits a Bid to its Broker-Dealer having a rate
higher than the Maximum Rate on the Auction Date will be treated as having
submitted a Sell Order to its Broker-Dealer. A Beneficial Owner that fails to
submit an Order to its Broker-Dealer will ordinarily be deemed to have submitted
a Hold Order to its Broker-Dealer; provided, however, that if a Beneficial Owner
fails to submit an Order to its Broker-Dealer for an Auction relating to a Rate
Period for Municipal Preferred of more than 28 Rate Period Days, such Beneficial
Owner will be deemed to have submitted a Sell Order to its Broker-Dealer. A Sell
Order shall constitute an irrevocable offer to sell the shares of Municipal
Preferred subject thereto. A Beneficial Owner that offers to become the
Beneficial Owner of additional shares of Municipal Preferred is, for purposes of
such offer, a Potential Beneficial Owner of additional shares of Municipal
Preferred as discussed below.
A customer of a Broker-Dealer that is not a Beneficial Owner of shares of
Municipal Preferred but that wishes to purchase shares, or that is a Beneficial
Owner that wishes to purchase additional shares (in each case, a "Potential
Beneficial Owner"), may submit Bids to its Broker-Dealer in which it offers to
purchase shares of Municipal Preferred at $25,000 per share if the Applicable
Rate for the next Rate Period is not less than the rate specified in such Bid. A
Bid placed by a Potential Beneficial Owner specifying a rate higher than the
Maximum Rate on the Auction Date will not be accepted.
The Broker-Dealers in turn will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves (unless otherwise permitted by the Trust)
as Existing Holders in respect of shares subject to Orders submitted or deemed
submitted to them by Beneficial Owners and as Potential Holders in respect of
shares subject to Orders submitted to them by Potential Beneficial Owners.
However, neither the Trust nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with the foregoing. Any Order placed with the
Auction Agent by a Broker-Dealer as or on behalf of an Existing Holder or a
Potential Holder will be treated in the same manner as an Order placed with a
Broker-Dealer by a Beneficial Owner or Potential Beneficial Owner. Similarly,
any failure by a Broker-Dealer to submit to the Auction Agent an Order in
respect of any shares of Municipal Preferred held by it or customers who are
Beneficial Owners will be treated in the same manner as a Beneficial Owner's
failure to submit to its Broker-Dealer an Order in respect of shares of
Municipal Preferred held by it. A Broker-Dealer may also submit Orders to the
Auction Agent for its own account as an Existing Holder or Potential Holder,
provided it is not an affiliate of the Trust. The Auction Agent after each
Auction for shares of Municipal Preferred will pay to each Broker-Dealer, from
funds provided by the Trust, a service charge at the annual rate of 1/4 of 1% in
the case of any Auction immediately preceding a Rate Period of less than one
year, or a percentage agreed to by the Trust and the Broker-Dealers in the case
of any Auction immediately preceding a Rate Period of one year or longer, of the
purchase price of shares of Municipal Preferred placed by such Broker-Dealer at
such Auction. See "The Auction -- Broker-Dealers" in the Statement of Additional
Information.
If Sufficient Clearing Bids exist (that is, the number of shares of
Municipal Preferred subject to Bids submitted or deemed submitted to the Auction
Agent by Broker-Dealers as or on behalf of Potential Holders with rates equal to
or lower than the Maximum Rate is at least equal to the number of shares of
Municipal Preferred subject to Sell Orders submitted or deemed submitted to the
Auction Agent by Broker-Dealers as or on behalf of Existing Holders), the
Applicable Rate for the next succeeding Rate Period will be the lowest rate
specified in the Submitted Bids which, taking into account such rate and all
lower rates bid by Broker-Dealers as or on behalf of Existing Holders and
Potential Holders, would result in Existing Holders and Potential Holders owning
all the shares of Municipal Preferred available for purchase in the Auction. If
Sufficient Clearing Bids do not exist, the Applicable Rate for the next
succeeding Rate Period will be the Maximum Rate on the Auction Date. In such
event, Beneficial Owners that have submitted or are deemed to have submitted
Sell Orders may not be able to sell in such Auction all shares of Municipal
Preferred subject to such Sell Orders. If Broker-Dealers submit or are deemed to
have submitted to the Auction Agent Hold Orders with respect to all Existing
Holders, the Applicable Rate for the next succeeding Rate Period will be the All
Hold Order Rate.
The Auction Procedures include a pro rata allocation of shares for purchase
and sale, which may result in an Existing Holder continuing to hold or selling,
or a Potential Holder purchasing, a number of shares of Municipal Preferred that
is fewer than the number of shares of Municipal Preferred specified in its
Order. To the extent the allocation procedures have that result, Broker-Dealers
that have designated themselves as Existing Holders or Potential Holders in
respect of customer Orders will be required to make appropriate pro rata
allocations among their respective customers.
Settlement of purchases and sales with respect to shares of each series of
Municipal Preferred will be made on the next Business Day (also a Dividend
Payment Date) after the Auction Date through the Securities Depository.
Purchasers will make payment through their Agent Members in same-day funds to
the Securities Depository against delivery to their respective Agent Member. The
Securities Depository will make payment to the Sellers' Agent Members in
accordance with the Securities Depository's normal procedures, which now provide
for payment against delivery by their Agent Members in same-day funds. The
settlement procedures to be used with respect to Auctions for shares of
Municipal Preferred are set forth in Appendix D to the Statement of Additional
Information.
The first Auction for shares of Municipal Preferred will be held on Tuesday,
December 12, 2000 for Series T and Thursday, December 14, 2000 for Series TH,
the Business Day preceding the Dividend Payment Date for the Initial Rate Period
of each respective series. Thereafter, except during Special Rate Periods,
Auctions will normally be held every Tuesday for Series T and Thursday for
Series TH, and each Subsequent Rate Period will normally begin on the following
Wednesday for Series T and Friday for Series TH.
Except as noted below, whenever the Trust intends to include any net capital
gain or other income taxable for federal income tax purposes in any dividend on
shares of Municipal Preferred, the Trust shall, in the case of Minimum Rate
Periods or Special Rate Periods of 28 Rate Period Days or fewer, and may, in the
case of any other Special Rate Period, notify the Auction Agent of the amount to
be so included not later than the Dividend Payment Date next preceding the
Auction Date on which the Applicable Rate for such dividend is to be
established. Whenever the Auction Agent receives such notice from the Trust, it
will be required in turn to notify each Broker-Dealer, who, on or prior to such
Auction Date, in accordance with its Broker-Dealer Agreement, will be required
to notify its customers who are Beneficial Owners and Potential Beneficial
Owners believed by it to be interested in submitting an Order in the Auction to
be held on such Auction Date. The Trust may also include such net capital gain
or other income taxable for federal income tax purposes in a dividend on shares
of Municipal Preferred without giving advance notice if the dividend is
increased by a Gross-Up Payment. The Trust must notify the Auction Agent of the
additional amounts to be included in such dividend at least five Business Days
prior to the applicable Dividend Payment Date.
SECONDARY MARKET TRADING AND TRANSFER OF MUNICIPAL PREFERRED
The Broker-Dealers (including the Underwriter) expect, but are not
obligated, to maintain a secondary trading market in shares of Municipal
Preferred outside of Auctions. The Broker-Dealers may discontinue such activity
at any time. There can be no assurance that a secondary trading market for
shares of Municipal Preferred will develop or, if it does develop, that it will
provide owners with liquidity of investment. The shares of Municipal Preferred
will not be registered on any stock exchange or on the National Association of
Securities Dealers Automated Quotations System. Investors who purchase shares of
Municipal Preferred in an Auction for a Special Rate Period should note that
because the dividend rate on such shares will be fixed for the length of such
Rate Period, the secondary market value of such shares may fluctuate in response
to the changes in interest rates, and may be more or less than their original
cost if sold on the open market in advance of the next Auction thereof,
depending on market conditions.
A Beneficial Owner or an Existing Holder may sell, transfer, or otherwise
dispose of shares of Municipal Preferred only in whole shares and only (1)
pursuant to a Bid or Sell Order placed with the Auction Agent in accordance with
the Auction Procedures, (2) to a Broker-Dealer or (3) to such other persons as
may be permitted by the Trust; provided, however, that (a) a sale, transfer or
other disposition of shares of Municipal Preferred from a customer of a
Broker-Dealer who is listed on the records of that Broker-Dealer as the holder
of such shares to that Broker-Dealer or another customer of that Broker-Dealer
shall not be deemed to be a sale, transfer or other disposition for purposes of
the foregoing if such Broker-Dealer remains the Existing Holder of the shares so
sold, transferred or disposed of immediately after such sale, transfer or
disposition and (b) in the case of all transfers other than pursuant to
Auctions, the Broker-Dealer (or other person, if permitted by the Trust) to whom
such transfer is made shall advise the Auction Agent of such transfer.
DETERMINATION OF NET ASSET VALUE
Net asset value of the Trust will be determined no less frequently than as
of the close of regular trading on the New York Stock Exchange (the "Exchange")
(generally 4:00 p.m. New York City time) on the last Business Day of each week
(generally Friday), and at such other times as the Trust may authorize. The net
asset value of the Trust equals the value of the Trust's assets less the Trust's
liabilities. Debt securities (other than short-term obligations which mature in
60 days or less), including listed issues, are valued on the basis of valuations
furnished by dealers or by a pricing service with consideration to factors such
as institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics, and other market
data, without exclusive reliance upon exchange or over-the-counter prices.
Short-term obligations, which mature in 60 days or less, are valued at amortized
cost, which approximates market value. Securities for which there are no such
quotations or valuations are valued in good faith, at fair value, by the
Trustees.
DESCRIPTION OF MUNICIPAL PREFERRED
GENERAL
The Declaration of Trust of the Trust (the "Declaration") provides that the
Trust may authorize separate classes of shares of beneficial interest. The
Statement authorizes the issuance of 5,600 preferred shares of beneficial
interest, no par value per share, which may be issued from time to time in such
series and with such designations, preferences and other rights, qualifications,
limitations and restrictions as are determined in a resolution of the Board of
Trustees ("Preferred Shares"). The Statement authorizes the issuance of up to
2,800 shares of Series T and 2,800 shares of Series TH Municipal Preferred.
Shares of Municipal Preferred carry one vote per share. Shares of Municipal
Preferred will, when issued, be fully paid and, subject to matters discussed in
"Shareholder Liability" in the Statement of Additional Information,
nonassessable, and will have no pre-emptive or conversion rights or rights to
cumulative voting.
DIVIDENDS AND DIVIDEND PERIODS
GENERAL. The Initial Rate Period for Series T Municipal Preferred shares is a
period consisting of 8 days. The Initial Rate Period for Series TH Municipal
Preferred shares is a period consisting of 6 days. Any Subsequent Rate Period
will be a Minimum Rate Period (7 Rate Period Days) unless the Trust, subject to
certain conditions, designates such Subsequent Rate Period as a Special Rate
Period. See "Designation of Special Rate Periods" below.
Dividends on the shares of Municipal Preferred will be payable, when, as and
if declared by the Board of Trustees out of funds legally available therefor in
accordance with the Declaration, the Statement and applicable law on Wednesday,
December 13, 2000 for Series T and Friday, December 15, 2000 for Series TH, and
thereafter on each Wednesday for Series T and Friday for Series TH; provided,
however, that (1) if the day on which dividends would otherwise be payable is
not a Business Day, then dividends shall be payable instead on the first
Business Day that falls after such regular dividend payment day and (2) the
Trust may specify different Dividend Payment Dates in respect of any Special
Rate Period of such shares of more than 28 Rate Period Days.
The amount of dividends per share payable on shares of Municipal Preferred
on any date on which dividends shall be payable on such shares shall be computed
by multiplying the Applicable Rate in effect for such Dividend Period or
Dividend Periods or part thereof for which dividends have not been paid by a
fraction, the numerator of which shall be the number of days in such Dividend
Period or Dividend Periods or part thereof and the denominator of which shall be
365 if such Dividend Period consists of 7 Rate Period Days and 360 for all other
Dividend Periods, and applying the rate obtained against $25,000.
Dividends will be paid through the Securities Depository on each Dividend
Payment Date in accordance with its normal procedures, which now provide for it
to distribute dividends in next-day funds to Agent Members, who in turn are
expected to distribute such dividend payments to the persons for whom they are
acting as agents. Each of the initial Broker-Dealers, however, has indicated to
the Trust that such Broker-Dealer or the Agent Member designated by such
Broker-Dealer will make such dividend payments available in same-day funds on
each Dividend Payment Date to customers that use such Broker-Dealer or its
designee as Agent Member.
Dividends on shares of Municipal Preferred shall accumulate from the Date of
Original Issue. The dividend rate for Series T Municipal Preferred shares for
the Initial Rate Period will be 4.30% per annum. The dividend rate for Series TH
Municipal Preferred shares for the Initial Rate Period will be 4.30% per annum.
For each Subsequent Rate Period, the dividend rate will be the Applicable Rate
that the Auction Agent advises the Trust results from an Auction, except as
provided below.
The Applicable Rate that results from an Auction will not be greater than
the Maximum Rate for shares of a series of Municipal Preferred which is:
(i) in the case of any Auction Date which is not the Auction Date
immediately prior to the first day of any proposed Special Rate Period, the
product of (1) the Reference Rate on such Auction Date for the next Rate
Period of shares of such series and (2) the Rate Multiple on such Auction
Date, unless such shares of such series have or had a Special Rate Period
(other than a Special Rate Period of 28 Rate Period Days or fewer) and an
Auction at which Sufficient Clearing Bids existed has not yet occurred for a
Minimum Rate Period after such Special Rate Period, in which case the higher
of:
(A) the dividend rate on such shares of such series of the
then-ending Rate Period; and
(B) the product of (x) the higher of (I) the Reference Rate on such
Auction Date for a Rate Period equal in length to the then-ending Rate
Period, if such then-ending Rate Period was 364 Rate Period Days or
fewer, or the Treasury Note Rate on such Auction Date for a Rate Period
equal in length to the then-ending Rate Period of shares of such series,
if such then-ending Rate Period was more than 364 Rate Period Days, and
(II) the Reference Rate on such Auction Date for a Rate Period equal in
length to such Special Rate Period of shares of such series, if such
Special Rate Period was 364 Rate Period Days or fewer, or the Treasury
Note Rate on such Auction Date for a Rate Period equal in length to such
Special Rate Period, if such Special Rate Period was more than 364 Rate
Period Days and (y) the Rate Multiple on such Auction Date; or
(ii) in the case of any Auction Date which is the Auction Date
immediately prior to the first day of any proposed Special Rate Period, the
product of (1) the highest of (x) the Reference Rate on such Auction Date
for a Rate Period equal in length to the then-ending Rate Period of shares
of such series, if such then-ending Rate Period was 364 Rate Period Days or
fewer, or the Treasury Note Rate on such Auction Date for a Rate Period
equal in length to the then-ending Rate Period of such series, if such
then-ending Rate Period was more than 364 Rate Period Days, (y) the
Reference Rate on such Auction Date for the Special Rate Period for which
the Auction is being held if such Special Rate Period is 364 Rate Period
Days or fewer or the Treasury Note Rate on such Auction Date for the Special
Rate Period for which the Auction is being held if such Special Rate Period
is more than 364 Rate Period Days, and (z) the Reference Rate on such
Auction Date for Minimum Rate Periods and (2) the Rate Multiple on such
Auction Date.
If any Auction for any Subsequent Rate Period is not held for any reason
other than as described below, the dividend rate on shares of such series for
such Subsequent Rate Period will be the Maximum Rate on the Auction Date for
such Subsequent Rate Period.
If the Trust fails to pay in a timely manner to the Auction Agent the full
amount of any dividend on, or the redemption price of, shares of Municipal
Preferred during any Rate Period thereof (other than any Special Rate Period of
more than 364 Rate Period Days or any Rate Period succeeding any Special Rate
Period of more than 364 Rate Period Days during which such a failure occurred
that has not been cured), and, prior to 12:00 Noon on the third Business Day
next succeeding the date such failure occurred, such failure shall have been
cured, as described more fully in the Statement of Additional Information, no
Auction will be held in respect of shares of such series for the Subsequent Rate
Period thereof and the dividend rate for shares of Municipal Preferred for such
Subsequent Rate Period will be the Maximum Rate on the Auction Date for such
Subsequent Rate Period.
If the Trust fails to pay in a timely manner to the Auction Agent the full
amount of any dividend on, or the redemption price of, any shares of Municipal
Preferred during any Rate Period (other than any Special Rate Period of more
than 364 Rate Period Days or any Rate Period succeeding any Special Rate Period
of more than 364 Rate Period Days during which such a failure occurred that has
not been cured), and, prior to 12:00 Noon on the third Business Day next
succeeding the date on which such failure occurred, such failure shall not have
been cured, as described more fully in the Statement of Additional Information,
no Auction will be held in respect of such shares of such series for the first
Subsequent Rate Period thereof thereafter (or for any Rate Period thereof
thereafter to and including the Rate Period during which such failure is so
cured no later than 12:00 Noon on the fourth Business Day prior to the end of
such Rate Period), and the dividend rate for such shares for each such
Subsequent Rate Period shall be a rate per annum equal to the Maximum Rate on
the Auction Date for each such Subsequent Rate Period (but with the prevailing
rating for such shares, for purposes of determining such Maximum Rate, being
deemed to be "Below "ba3"/BB-").
If the Trust fails to pay in a timely manner to the Auction Agent the full
amount of any dividend on, or the redemption price of, any shares of Municipal
Preferred during a Special Rate Period of more than 364 Rate Period Days, or
during any Rate Period succeeding any Special Rate Period of more than 364 Rate
Period Days during which such a failure occurred that has not been cured prior
to 12:00 Noon, New York City time, on the fourth Business Day preceding the
Auction Date for the Rate Period subsequent to such Rate Period and as more
fully described in the Statement of Additional Information, no Auction will be
held in respect of shares of such series for such Subsequent Rate Period thereof
(or for any Rate Period thereof thereafter to and including the Rate Period
during which such failure is so cured), and the dividend rate for each such
Subsequent Rate Period shall be a rate per annum equal to the Maximum Rate on
the Auction Date for each such Subsequent Rate Period (but with the prevailing
rating for such shares of such series, for purposes of determining such Maximum
Rate, being deemed to be "Below "ba3"/BB-").
A failure to pay dividends on or the redemption price of shares of Municipal
Preferred shall have been cured with respect to any Rate Period if, within the
respective time periods described above, the Trust shall have paid to the
Auction Agent (i) all accumulated and unpaid dividends on the shares of
Municipal Preferred of such series and (ii) without duplication, the redemption
price for the shares of Municipal Preferred of such series, if any, for which
notice of redemption has been mailed by the Trust; provided, however, that the
foregoing clause (ii) shall not apply to the Trust's failure to pay the
redemption price in respect of shares of Municipal Preferred when the related
notice of redemption provides that redemption of such shares is subject to one
or more conditions precedent and any such condition precedent shall not have
been satisfied at the time or times and in the manner specified in such notice
of redemption.
GROSS-UP PAYMENTS. Holders of shares of Municipal Preferred shall be entitled to
receive, when, as and if declared by the Board of Trustees, out of funds legally
available therefor in accordance with the Declaration, the Statement and
applicable law, dividends in an amount equal to the aggregate Gross-Up Payments
in accordance with the following:
If, in the case of any Minimum Rate Period or any Special Rate Period of 28
Rate Period Days or fewer, or, in the case of any other Special Rate Period, the
Trust allocates any net capital gain or other income taxable for federal income
tax purposes to a dividend paid on shares of Municipal Preferred without having
given advance notice thereof to the Auction Agent as described above under "The
Auction -- Auction Procedures" (a "Taxable Allocation") solely by reason of the
fact that such allocation is made retroactively as a result of the redemption of
all or a portion of the outstanding shares of Municipal Preferred or the
liquidation of the Trust, the Trust shall, prior to the end of the fiscal year
in which such dividend was paid or written 90 days (and generally within 60
days) after the end of the Trust's fiscal year for which a retroactive Taxable
Allocation is made, provide notice thereof to the Auction Agent and direct the
Trust's dividend disbursing agent to send such notice with a Gross-Up Payment to
each holder of shares (initially Cede & Co., as nominee of the Securities
Depository) that was entitled to such dividend payment with respect to shares of
Municipal Preferred during such fiscal year at such holder's address as the same
appears or last appeared on the record books of the Trust. The Trust, within 30
days after such notice is given to the Auction Agent, will pay to the Auction
Agent (who then will distribute to such holders of Municipal Preferred), out of
funds legally available therefor, an amount equal to the aggregate Gross-Up
Payment with respect to all retroactive Taxable Allocations made to such holder
during the fiscal year in question.
If the Trust does not give advance notice of the amount of taxable income to
be included in a dividend on shares of Municipal Preferred in the related
Auction, the Trust may include such taxable income in a dividend on shares of
Municipal Preferred if it increases the dividend by an additional amount
calculated as if such income were a retroactive Taxable Allocation and the
additional amount was a Gross-Up Payment.
The Trust shall not be required to make Gross-Up Payments with respect to
any net capital gain or other taxable income determined by the Internal Revenue
Service to be allocable in a manner different from that allocated by the Trust.
A "Gross-Up Payment" in respect of any dividend means payment to a holder of
shares of Municipal Preferred of an amount which, giving effect to the Taxable
Allocations made with respect to such dividend, would cause such holder's
after-tax returns (taking into account both the Taxable Allocations and the
Gross-Up Payment) to be equal to the after-tax return the holder would have
received if no such Taxable Allocations had occurred. Such Gross-Up Payment
shall be calculated: (i) without consideration being given to the time value of
money; (ii) assuming that no holder of shares of Municipal Preferred is subject
to the Federal alternative minimum tax with respect to dividends received from
the Trust; and (iii) assuming that each holder of shares of Municipal Preferred
is taxable at the maximum marginal regular Federal individual income tax rate
applicable to ordinary income or net capital gain, as applicable, or the maximum
marginal regular Federal corporate income tax rate applicable to ordinary income
or net capital gain, as applicable, whichever is greater, in effect at the time
such Gross-Up Payment is made.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS. For so long as any shares of
Municipal Preferred are outstanding, the Trust may not declare, pay or set apart
for payment any dividend or other distribution (other than a dividend or
distribution paid in shares of, or in options, warrants or rights to subscribe
for or purchase, Common Shares) in respect of Common Shares or call for
redemption, redeem, purchase or otherwise acquire for consideration any Common
Shares (except by conversion into or exchange for shares of the Trust ranking
junior to the shares of Municipal Preferred as to the payment of dividends and
the distribution of assets upon liquidation), unless (1) full cumulative
dividends on shares of Municipal Preferred through their most recently ended
Dividend Period shall have been paid or shall have been declared and sufficient
funds for the payment thereof deposited with the Auction Agent; (2) the Trust
has redeemed the full number of shares of Municipal Preferred required to be
redeemed by any provision for mandatory redemption pertaining thereto; and (3)
immediately after such transaction the Discounted Value of the Trust's portfolio
would at least equal the Municipal Preferred Basic Maintenance Amount in
accordance with guidelines of the rating agency or agencies then rating the
shares of Municipal Preferred.
Except as set forth in the next sentence, no dividends shall be declared or
paid or set apart for payment on any class or series of shares of beneficial
interest of the Trust ranking, as to the payment of dividends, on a parity with
shares of Municipal Preferred for any period unless full cumulative dividends
have been or contemporaneously are declared and paid on the shares of Municipal
Preferred through their most recent Dividend Payment Date. When dividends are
not paid in full upon the shares of Municipal Preferred through their most
recent Dividend Payment Date or upon any other class or series of shares ranking
on a parity as to the payment of dividends with shares of Municipal Preferred
through their most recent respective dividend payment dates, all dividends
declared upon shares of Municipal Preferred and any other such class or series
of shares ranking on a parity as to the payment of dividends with shares of
Municipal Preferred shall be declared pro rata so that the amount of dividends
declared per share on shares of Municipal Preferred and such other class or
series of shares shall in all cases bear to each other the same ratio that
accumulated dividends per share on the shares of Municipal Preferred and such
other class or series of shares bear to each other.
DESIGNATION OF SPECIAL RATE PERIODS
The Trust, at its option, may designate any succeeding Subsequent Rate
Period as a Special Rate Period consisting of a specified number of Rate Period
Days evenly divisible by seven and not more than 1,820 (approximately 5 years),
subject to certain adjustments. A designation of a Special Rate Period shall be
effective only if, among other things, (i) the Trust shall give certain notices
to the Auction Agent, (ii) an Auction for such shares shall have been held on
the Auction Date immediately preceding the first day of such proposed Special
Rate Period and Sufficient Clearing Bids for such shares shall have existed in
such Auction and (iii) if the Trust shall have mailed a notice of redemption
with respect to any shares of Municipal Preferred, the redemption price with
respect to such shares shall have been deposited with the Auction Agent. The
Trust may declare a Special Rate Period if, for example, it expects that
short-term rates may increase or market conditions otherwise change, in an
effort to optimize the effect of the Trust's leverage on common shareholders.
VOTING RIGHTS
In addition to voting rights described below under "Certain Provisions in
the Declaration of Trust" and in the Statement of Additional Information under
"Investment Objective and Policies -- Fundamental Investment Policies," holders
of shares of Municipal Preferred, voting as a separate class, are entitled to
elect (1) two trustees of the Trust at all times and (2) a majority of the
trustees if at any time dividends on shares of Municipal Preferred shall be
unpaid in an amount equal to two years dividends thereon, and to continue to be
so represented until all dividends in arrears shall have been paid or otherwise
provided for. In all other cases, trustees shall be elected by holders of Common
Shares and Preferred Shares (including Municipal Preferred), voting together as
a single class.
Subject to the voting rights described above and except as otherwise
specified under "Certain Provisions in the Declaration of Trust," the Trust may
not, among other things, without the approval of the holders of a "majority of
the outstanding" shares of Municipal Preferred, voting as a separate class,
approve any plan of reorganization adversely affecting shares of Municipal
Preferred. In addition, the Trust may not, without the affirmative vote of the
holders of at least a majority of the shares of Municipal Preferred outstanding
at the time, voting as a separate class: (a) authorize, create or issue
additional shares of Municipal Preferred or classes or series of Preferred
Shares ranking prior to or on a parity with shares of Municipal Preferred with
respect to the payment of dividends or the distribution of assets upon
liquidation (except as provided below) or (b) amend, alter or repeal the
provisions of the Declaration or the By-Laws, whether by merger, consolidation
or otherwise, so as to materially affect any preference, right or power of such
shares of Municipal Preferred or the holders thereof; provided, however, that a
division of a share of Municipal Preferred shall be deemed to materially affect
any such preference, right or power only if the terms of such division adversely
affect the holders of shares of Municipal Preferred. The Trust may not, without
the affirmative vote of the holders of at least 66 2/3% of the shares of
Municipal Preferred outstanding at the time, voting as a separate class, file a
voluntary application for relief under Federal bankruptcy law or any similar
application under state law for so long as the Trust is solvent and does not
foresee becoming insolvent. Notwithstanding the second sentence of this
paragraph, the Trust may, without the vote of the holders of shares of Municipal
Preferred, authorize, create or issue additional shares of Municipal Preferred
or classes or series of Preferred Shares ranking on a parity with shares of
Municipal Preferred with respect to the payment of dividends and the
distribution of assets upon liquidation if the Trust obtains written
confirmation from Moody's (if Moody's is then rating the shares of Municipal
Preferred) and Standard & Poor's (if Standard & Poor's is then rating the shares
of Municipal Preferred) that the issuance of any such additional shares or class
or series of shares would not impair the rating then assigned by such rating
agency to shares of Municipal Preferred; provided, however, that if Moody's or
Standard & Poor's is not then rating the shares of Municipal Preferred, the
aggregate liquidation preference of all Preferred Shares of the Trust
outstanding after any such issuance, exclusive of accumulated and unpaid
dividends, may not exceed $140,000,000. If any action set forth in this
paragraph would adversely affect the rights of one or more series (the "Affected
Series") of Municipal Preferred in a manner different from any other series of
Municipal Preferred, the Trust will not approve any such action without the
affirmative vote of the holders of at least a majority of the shares of each
such Affected Series outstanding at the time (each such Affected Series voting
as a separate class).
REDEMPTION
MANDATORY REDEMPTION. In the event the Trust does not timely cure a failure to
maintain (1) a Discounted Value of its portfolio equal to the Municipal
Preferred Basic Maintenance Amount or (2) the 1940 Act Municipal Preferred Asset
Coverage, in each case in accordance with the requirements of the rating agency
or agencies then rating the shares of Municipal Preferred, shares of Municipal
Preferred will be subject to mandatory redemption on a date specified by the
Board of Trustees, out of funds legally available therefor in accordance with
the Declaration, the Statement and applicable law, at the redemption price of
$25,000 per share plus an amount equal to accumulated but unpaid dividends
thereon (whether or not earned or declared) to (but not including) the date
fixed for redemption. Any such redemption will be limited to the number of
shares of Municipal Preferred necessary to restore the required Discounted Value
or the 1940 Act Municipal Preferred Asset Coverage, as the case may be.
In determining the number of shares of Municipal Preferred required to be
redeemed in accordance with the foregoing, the Trust will allocate the number of
shares required to be redeemed to satisfy the Municipal Preferred Basic
Maintenance Amount or the 1940 Act Municipal Preferred Asset Coverage, as the
case may be, pro rata among shares of Municipal Preferred and other Preferred
Shares of the Trust, subject to redemption or retirement.
OPTIONAL REDEMPTION. Shares of Municipal Preferred are redeemable, at the option
of the Trust:
(i) in whole or in part, on the second Business Day preceding any
Dividend Payment Date for such shares, out of funds legally available
therefor in accordance with the Declaration, the Statement and applicable
law, at the redemption price of $25,000 per share plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared)
to (but not including) the date fixed for redemption; provided, however,
that (1) shares of Municipal Preferred may not be redeemed in part if after
such partial redemption fewer than 500 shares remain outstanding and (2) the
notice establishing a Special Rate Period of shares of Municipal Preferred,
as delivered to the Auction Agent and filed with the Secretary of the Trust,
may provide that such shares shall not be redeemable during the whole or any
part of such Special Rate Period (except as provided in (ii) below) or shall
be redeemable during the whole or any part of such Special Rate Period only
upon payment of such redemption premium or premiums as shall be specified
therein; and
(ii) as a whole but not in part, out of funds legally available therefor
in accordance with the Declaration, the Statement and applicable law, on the
first day following any Dividend Period included in a Rate Period of more
than 364 Rate Period Days if, on the date of determination of the Applicable
Rate for such Rate Period, such Applicable Rate equaled or exceeded on such
date of determination the Treasury Note Rate for such Rate Period, at a
redemption price of $25,000 per share plus an amount equal to accumulated
but unpaid dividends thereon (whether or not earned or declared) to (but not
including) the date fixed for redemption.
Notwithstanding the foregoing, if any dividends on shares of Municipal
Preferred (whether or not earned or declared) are in arrears, no shares of a
series of Municipal Preferred shall be redeemed unless all outstanding shares of
such series of Municipal Preferred are simultaneously redeemed, and the Trust
shall not purchase or otherwise acquire any shares of such series of Municipal
Preferred; provided, however, that the foregoing shall not prevent the purchase
or acquisition of all outstanding shares of such series of Municipal Preferred
pursuant to the successful completion of an otherwise lawful purchase or
exchange offer made on the same terms to, and accepted by, holders of all
outstanding shares of such series of Municipal Preferred.
LIQUIDATION
Upon a liquidation of the Trust, whether voluntary or involuntary, the
holders of shares of Municipal Preferred then outstanding will be entitled to
receive and to be paid out of the assets of the Trust available for distribution
to its shareholders, an amount equal to the aggregate of (i) the liquidation
preference with respect to such shares ($25,000 per share), (ii) an amount equal
to all dividends thereon (whether or not earned or declared) accumulated but
unpaid to (but not including) the date of final distribution in same-day funds,
and (iii) any applicable Gross-up Payments in connection with the liquidation of
the Trust. The holders of shares of Municipal Preferred will receive this amount
before any payment or distribution shall be made on the Common Shares. The right
to such amount, upon liquidation, is subject to the rights of holders of any
series or class or classes of shares ranking on a parity with shares of
Municipal Preferred with respect to the distribution of assets upon liquidation
of the Trust. After the payment to the holders of the shares of Municipal
Preferred of the full preferential amounts provided for as described herein, the
holders of Municipal Preferred as such shall have no right or claim to any of
the remaining assets of the Trust.
Neither the sale of all or substantially all the property or business of the
Trust, nor the merger or consolidation of the Trust into or with any
Massachusetts business trust or corporation nor the merger or consolidation of
any Massachusetts business trust or corporation into or with the Trust shall be
a liquidation, whether voluntary or involuntary, for the purposes of the
foregoing paragraph.
RATING AGENCY GUIDELINES
The Trust is required under Moody's and Standard & Poor's guidelines to
maintain assets having in the aggregate a Discounted Value at least equal to the
Municipal Preferred Basic Maintenance Amount. Moody's and Standard & Poor's have
each established separate guidelines for determining Discounted Value. To the
extent any particular portfolio holding does not satisfy the applicable rating
agency's guidelines, all or a portion of such holding's value will not be
included in the calculation of Discounted Value (as defined by such rating
agency). The Moody's and Standard & Poor's guidelines do not impose any
limitations on the percentage of Trust assets that may be invested in holdings
not eligible for inclusion in the calculation of the Discounted Value of the
Trust's portfolio. The amount of such assets included in the portfolio at any
time may vary depending upon the rating, diversification and other
characteristics of the eligible assets included in the portfolio. The Municipal
Preferred Basic Maintenance Amount includes the sum of (i) the aggregate
liquidation preference of shares of Municipal Preferred then outstanding and
(ii) certain accrued and projected payment obligations of the Trust.
The Trust is also required under rating agency guidelines to maintain, with
respect to the shares of Municipal Preferred, as of the last Business Day of
each month in which any shares of Municipal Preferred are outstanding, asset
coverage of at least 200% with respect to senior securities which are shares,
including shares of Municipal Preferred (or such other asset coverage as may in
the future be specified in or under the 1940 Act as the minimum asset coverage
for senior securities which are shares of a closed-end investment company as a
condition of declaring dividends on its common shares) ("1940 Act Municipal
Preferred Asset Coverage"). Based on the composition of the Trust's portfolio
and market conditions as of October 31, 2000, the 1940 Act Municipal Preferred
Asset Coverage with respect to shares of Municipal Preferred, assuming the
issuance on the date hereof of all shares of Municipal Preferred offered hereby
and after giving effect to the deduction of the sales load and offering costs
relating thereto estimated at $1,918,460, would be computed as follows:
<TABLE>
<CAPTION>
VALUE OF TRUST ASSETS LESS LIABILITIES NOT
CONSTITUTING SENIOR SECURITIES
------------------------------------------
<S> <C> <C>
$443,870,662
------------
= = 317%
Senior securities representing indebtedness plus $140,000,000
liquidation value of the shares of Municipal Preferred ------------
</TABLE>
In the event the Trust does not timely cure a failure to maintain (1) a
Discounted Value of its portfolio equal to the Municipal Preferred Basic
Maintenance Amount or (2) the 1940 Act Municipal Preferred Asset Coverage, in
each case in accordance with the requirements of the rating agency or agencies
then rating the shares of Municipal Preferred, the Trust will be required to
redeem shares of Municipal Preferred as described above under "Description of
Municipal Preferred -- Redemption."
The Trust may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by Moody's or Standard & Poor's.
Failure to adopt any such modifications, however, may result in a change in the
ratings described above or a withdrawal of ratings altogether. In addition, any
rating agency providing a rating for the shares of Municipal Preferred may, at
any time, change or withdraw any such rating. The Board of Trustees may, without
shareholder approval, amend, alter or repeal any or all of the definitions and
related provisions which have been adopted by the Trust pursuant to the rating
agency guidelines in the event the Trust receives written confirmation from
Moody's or Standard & Poor's, or both, as appropriate, that any such change
would not impair the ratings then assigned by Moody's and Standard & Poor's to
shares of Municipal Preferred.
As described by Moody's and Standard & Poor's, a preferred share rating is
an assessment of the capacity and willingness of an issuer to pay preferred
share obligations. The ratings on the Municipal Preferred are not
recommendations to purchase, hold or sell shares of Municipal Preferred,
inasmuch as the ratings do not comment as to market price or suitability for a
particular investor. The rating agency guidelines described above also do not
address the likelihood that an owner of shares of Municipal Preferred will be
able to sell such shares in an Auction or otherwise. The ratings are based on
current information furnished to Moody's and Standard & Poor's by the Trust and
the Adviser, and information obtained from other sources. The ratings may be
changed, suspended or withdrawn as a result of changes in, or the unavailability
of, such information.
A rating agency's guidelines will apply to shares of Municipal Preferred
only so long as such rating agency is rating such shares. The Trust will pay
certain fees to Moody's or Standard & Poor's, or both, for rating shares of
Municipal Preferred.
DESCRIPTION OF COMMON SHARES
In addition to the shares of Municipal Preferred, the Declaration authorizes
the issuance of an unlimited number of Common Shares, no par value. As of April
30, 2000, the Trust had 39,241,840 Common Shares outstanding and net assets of
$303,229,876. See "Financial Highlights," above.
All Common Shares have equal noncumulative voting rights and equal rights
with respect to dividends, assets and liquidation. Common Shares are fully paid
and nonassessable when issued and have no preemptive, conversion or exchange
rights. So long as any shares of Municipal Preferred are outstanding, the Trust
is not permitted to declare dividends on, make any distributions with respect
to, or purchase its Common Shares unless, at the time of such declaration,
distribution or purchase, as applicable (and after giving effect thereto), all
accumulated dividends on any preferred shares of the Trust have been paid.
In the past, the Trust's Common Shares have traded on the New York Stock
Exchange at various times at either a premium or a discount in relation to net
asset value. Shares of other closed-end investment companies frequently trade on
a stock exchange at a discount from net asset value.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
The Board of Trustees is divided into three classes, each having a term of
three years. Each year the term of one class expires. This may make it more
difficult to change the Trust's management and could have the effect of
depriving shareholders of an opportunity to sell their Common Shares at a
premium over prevailing market prices by discouraging a third party from seeking
to obtain control of the Trust in a tender offer or similar transaction. Also,
the Declaration provides that the affirmative vote or consent of two-thirds of
the outstanding Common Shares and any Preferred Shares of the Trust (including
shares of Municipal Preferred), voting together as a single class, and of the
Preferred Shares (including shares of Municipal Preferred) voting as a separate
class, would be required to authorize the conversion of the Trust from a
closed-end to an open-end investment company. This two-thirds vote requirement
is higher than the vote required under the 1940 Act. In addition, the
affirmative vote or consent of the holders of two-thirds of the outstanding
shares of the Trust is required to authorize any of the following transactions:
(i) merger or consolidation of the Trust with or into any other
corporation;
(ii) sale, lease or exchange of all or any substantial part of the
assets of the Trust to any entity or person (except assets having an
aggregate fair market value of less than $1,000,000); or
(iii) sale, lease or exchange to the Trust, in exchange for securities
of the Trust, of any assets of any entity or person (except assets having an
aggregate fair market value of less than $1,000,000) if such corporation,
person or entity is directly, or indirectly through affiliates, the
beneficial owner of five percent or more of the outstanding shares of the
Trust.
However, such vote or consent will not be required with respect to the foregoing
transactions where the Board of Trustees under certain conditions approves the
transaction.
The foregoing provisions will make more difficult a change in the Trust's
management, or consummation of the foregoing transactions without the Trustees'
approval, and could have the effect of depriving shareholders of an opportunity
to sell their shares at a premium over prevailing market prices by discouraging
a third party from seeking to obtain control of the Trust in a tender offer or
similar transaction. However, they provide the advantage of potentially
requiring persons seeking control of the Trust to negotiate with its management
regarding the price to be paid and facilitating the continuity of the Trust's
management.
Reference is made to the Declaration of Trust of the Trust, on file with
SEC, for the full text of these provisions.
REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND
REPURCHASE OF SHARES
Shares of closed-end investment companies frequently trade at a discount
from net asset value. The Board of Trustees regularly monitors the relationship
between the Trust's market price and net asset value. If shares of the Trust
were to trade at a substantial discount to net asset value for an extended
period of time, the Board may consider the repurchase of its Common Shares on
the open market or the making of tender offers for such shares. Since
commencement of the Trust's operations, no such open market purchases or tender
offers have been made, and no assurances can be given that such actions will be
taken in the future. Subject to its investment restrictions, the Trust may
borrow money to finance the repurchase of shares, subject to compliance with the
1940 Act Municipal Preferred Asset Coverage, Section 18 of the 1940 Act and the
other limitations described under "Rating Agency Guidelines." Shares may not be
repurchased, however, (i) if applicable asset coverage requirements under the
1940 Act (i.e., 200% with respect to any preferred shares of the Trust,
including shares of Municipal Preferred) are not met or would not be met
following such repurchase or (ii) if otherwise prohibited by applicable law.
There can be no assurance that repurchases or tenders, if they were to
occur, would result in the shares trading at a price which is equal to their net
asset value. The Trust anticipates that the market price of the shares will
usually vary from net asset value. The market price of the shares will be
determined, among other things, by the relative demand for and supply of the
shares in the market, the Trust's investment performance, the Trust's dividends
and yield and investor perception of the Trust's overall attractiveness as an
investment as compared with other investment alternatives. It should be
recognized that any such acquisitions of shares would decrease the total assets
of the Trust and therefore have the effect of increasing the Trust's expense
ratio. Furthermore, any interest on borrowings to finance share repurchase
transactions would reduce the Trust's net income.
CONVERSION TO OPEN-END STATUS
The Trust's Board of Trustees may from time to time consider submitting to
the holders of the shares of beneficial interest of the Trust at any time a
proposal to convert the Trust to an open-end investment company. In determining
whether to exercise its discretion to submit this issue to shareholders, the
Board of Trustees would consider all factors then relevant, including the
relationship of the market price of the Common Shares to net asset value, the
extent to which the Trust's capital structure is leveraged and the possibility
of re-leveraging, the spread, if any, between yields on lower rated securities
in the Trust's portfolio and interest and dividend charges on senior securities
and general market and economic conditions. In addition to any vote required by
Massachusetts law, conversion of the Trust to an open-end investment company
would require the affirmative vote of two-thirds of the Common Shares and any
Preferred Shares of the Trust (including shares of Municipal Preferred) entitled
to be voted on the matter, voting together as a single class, and of the
Preferred Shares (including shares of Municipal Preferred) entitled to be voted
on the matter, voting as a single class. This two-thirds vote requirement is
higher than the vote required under the 1940 Act. Shareholders of an open-end
investment company may require the company to redeem their shares at any time
(except in certain circumstances as authorized by or under the 1940 Act) at
their net asset value, less such redemption charges, if any, as might be in
effect at the time of redemption. If the Trust converted to an open-end
investment company, it would be required to redeem all shares of Municipal
Preferred then outstanding at the redemption price specified under "Description
of Municipal Preferred -- Redemption -- Optional Redemption." In addition, the
Trust could be required to liquidate portfolio securities to meet required and
requested redemptions, and its Common Shares would no longer be listed on the
Exchange. No assurance can be given that the Board will, at any time in the
future, decide to submit a proposal to convert to open-end status to the
shareholders of the Trust.
TAX MATTERS
The following discussion briefly summarizes some of the federal income tax
considerations generally applicable to investments in the Trust. This discussion
is based on the Code, existing Treasury regulations, rulings published by the
Internal Revenue Service and judicial decisions, all as of the date of this
prospectus. These authorities are subject to change, possibly with retroactive
effect. A more detailed summary is available under the heading "Tax Matters" in
the Statement of Additional Information. However, because each investor's tax
situation is different (especially with regard to state, local and foreign tax
considerations), investors are urged to consult their own tax advisers regarding
the tax considerations that may be applicable in their particular situations.
The Trust intends to qualify each year as a "regulated investment company"
under Subchapter M of the Code. Because the Trust intends to distribute all of
its net tax-exempt income, net investment income and net realized capital gains
to shareholders in accordance with the timing requirements imposed by the Code,
it is not expected that the Trust will be required to pay an entity-level
federal income or excise tax.
The Trust intends to satisfy applicable requirements of the Code so as to be
able to designate dividends that the Trust pays which are attributable to
interest on Municipal Bonds as "exempt-interest dividends." Exempt-interest
dividends are excludable from a shareholder's gross income for federal income
tax purposes, subject to the possible application of the federal alternative
minimum tax discussed below. Distributions of income, if any, from capital
gains, from investments in taxable securities, and from certain other
transactions, including futures transactions, will be taxable to shareholders.
The Trust will designate dividends paid as exempt-interest dividends in a manner
that allocates such dividends between the holders of the Common Shares and the
holders of shares of Municipal Preferred in proportion to the total dividends
paid to each of those classes for a given taxable year, or as otherwise as
required by applicable law. Long-term capital gain distributions and other
income subject to regular federal income tax will similarily be allocated
between the two classes. The amount of taxable income allocable to Municipal
Preferred shares will depend on the amount of such income realized by the Trust,
but generally is not expected to be significant.
The Trust does not expect any of its dividends to qualify for the
dividends-received deduction for corporations. Shareholders may not have to pay
state or local taxes on the portion of dividends that the Trust pays from
interest on U.S. government obligations; investors should consult with their tax
advisers in this regard.
Interest on indebtedness incurred or continued by shareholders to purchase
or carry shares of the Trust will not be deductible for federal income tax
purposes to the extent attributable to exempt-interest dividends.
Exempt-interest dividends are taken into account in calculating the amount of
social security and railroad retirement benefits that may be subject to federal
income tax, and a portion of the Trust's exempt-interest dividends may be
treated as a tax preference item for purposes of the federal individual
alternative minimum tax. All exempt-interest dividends may affect a corporate
shareholder's alternative minimum tax liability. All or a portion of
exempt-interest dividends may be subject to state and local income taxes.
Exempt-interest dividends attributable to interest received on certain private
activity bonds and certain industrial development bonds will not be tax-exempt
to any shareholders who are, within the meaning of Section 147(a) of the Code
"substantial users" of the facilities financed by such bonds or who are related
to such "substantial users." Entities or persons who are "substantial users" (or
who are related to "substantial users") of facilities financed by private
activity bonds or industrial development bonds should consult their tax advisers
before purchasing shares of the Trust.
As described under the heading "Description of Municipal Preferred," above,
the Trust may be required to make Gross-up Payments to holders of Municipal
Preferred shares. Gross-up Payments are generally intended to put holders in the
same federal income tax position they would have been in had all of the
dividends paid to them consisted of exempt-interest dividends. However, Gross-up
Payments will not compensate for any foreign, state or local taxes on
distributions paid by the Trust, including foreign, state or local taxes on the
Gross-up Payments themselves. Gross-up Payments also will not compensate holders
in the event that the Internal Revenue Service recharacterizes as a taxable
distribution any payment that the Trust has designated as an exempt-interest
dividend (including a Gross-up Payment so designated).
The Trust intends to withhold U.S. federal income tax at the rate of 30% (or
any lower rate permitted by an applicable treaty) on any taxable dividends and
other payments that are subject to such withholding and that are made to persons
who are neither citizens nor residents of the U.S. Different tax consequences
may result if such person is engaged in a trade or business in the United States
and the dividends or other payments received are effectively connected with the
conduct of that trade or business. The Trust is also required under certain
circumstances to apply backup withholding at the rate of 31% on taxable
dividends paid to any shareholder (including a shareholder who is not a citizen
or resident of the U.S.) who does not furnish certain required information and
certifications to the Trust, or who is otherwise subject to backup withholding.
Backup withholding will not, however, be applied to payments that have been
subject to 30% withholding.
The Trust will send written notices to shareholders regarding the federal
income tax status of all dividends and distributions for each calendar year,
including the portion constituting exempt-interest dividends, the portion, if
any, taxable as ordinary income, the portion, if any, taxable as long-term
capital gain (as well as the rate category or categories under which such gain
is taxable), the portion, if any, representing a return of capital (which is
generally free of current taxes, but which results in a basis reduction), and
the amount, if any, of federal income tax withheld.
A shareholder's sale or disposition of Trust shares will ordinarily be a
taxable event for federal income tax purposes. A taxable disposition will result
in a capital gain or loss if the shares are held as a capital asset, which will
generally be a long-term capital gain or loss if the shares were held for more
than twelve months, and otherwise a short-term capital gain or loss. A loss
realized on a sale of shares held for six months or less will be disallowed to
the extent of exempt-interest dividends received on the shares, and any portion
allowed will be treated as a long-term capital loss to the extent of capital
gain dividends received on the shares (or the amount designated as undistributed
capital gain with respect to the shares). Losses may also be disallowed under
rules relating to wash sales. If shares are sold after tax-exempt income is
accrued but before it is paid as a dividend, the sales price generally will
reflect that accrued income, which will increase the taxable gain (or reduce the
loss) on the sale, even though the income would have been exempt from tax if
distributed as a dividend prior to the sale.
CUSTODIAN, AUCTION AGENT, TRANSFER AGENT,
DIVIDEND DISBURSING AGENT AND REGISTRAR
The Trust's securities and cash are held by State Street Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts 02110, as custodian (the
"Custodian") under a custodian contract.
Bankers Trust Company, serves as auction agent for the Trust in connection
with the shares of Municipal Preferred. Bankers Trust Company also serves as the
transfer agent, registrar, dividend disbursing agent and redemption agent for
shares of Municipal Preferred.
MFS Service Center, Inc., 2 Avenue de Lafayette, Boston, Massachusetts
02111-1738, is the shareholder servicing agent, registrar and transfer agent for
the Common Shares of the Trust.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement between
Salomon Smith Barney Inc. (the "Underwriter") and the Trust (the "Underwriting
Agreement") dated the date hereof, the Underwriter has agreed to purchase, and
the Trust has agreed to sell, 2,800 shares of Series T and 2,800 shares of
Series TH Municipal Preferred offered hereby.
The Underwriting Agreement provides that the obligations of the Underwriter
are subject to the approval of certain legal matters by counsel and to certain
conditions precedent, and that the Underwriter is obligated to purchase all of
the shares of Municipal Preferred if any are purchased. In the Underwriting
Agreement, the Trust and the Adviser have agreed to indemnify the Underwriter
with respect to certain liabilities, including liabilities arising under the
Securities Act of 1933, as amended, and to contribute in respect thereof.
The Trust has been advised by the Underwriter that it proposes initially to
offer the shares of each series of Municipal Preferred offered hereby to the
public at the price set forth on the cover page of this Prospectus and to
selected dealers at such price less a concession not to exceed $21.875 per
share. The underwriting commission to be paid by the Trust of $250 per share is
equal to 1% of the initial offering price. After the initial public offering,
the public offering price and the concession may be changed by the Underwriter.
Investors must pay for any Municipal Preferred purchased in the initial public
offering on or before December 7, 2000.
The Trust anticipates that the Underwriter may from time to time act as a
broker or dealer in connection with the execution of its portfolio transactions
after it has ceased to be an Underwriter. The Trust anticipates that the
Underwriter or one of its affiliates may, from time to time, act in Auctions as
Broker-Dealers as set forth under "The Auction -- General" and will receive the
fees described under "The Auction -- Broker-Dealers" in the Statement of
Additional Information in exchange for so acting. The Underwriter is an active
underwriter of, and dealer in, securities and acts as a market maker in a number
of such securities and therefore can be expected to engage in portfolio
transactions with the Trust.
The principal business address of Salomon Smith Barney Inc. is 388 Greenwich
Street, New York, New York 10010.
LEGAL OPINIONS
Certain legal matters in connection with the Series T and TH Municipal
Preferred offered hereby will be passed upon for the Trust by Bingham Dana LLP,
Boston, Massachusetts, and for the Underwriters by Simpson Thacher & Bartlett,
New York, New York. Simpson Thacher & Bartlett will rely, as to certain matters
of Massachusetts law in its opinion, on the opinion of Bingham Dana LLP.
REPORTS TO SHAREHOLDERS
The Trust will send unaudited semiannual and audited annual reports to its
shareholders based on Generally Accepted Accounting Principals in the United
States of America, including, as currently required by regulations of the
Securities and Exchange Commission, a list of investments held.
EXPERTS
The Financial Statements included in the Statement of Additional Information
have been so included in reliance on the report of Deloitte & Touche LLP,
independent accountants, given on the authority of said firm as experts in
accounting and auditing. The address of Deloitte & Touche LLP is 200 Berkeley
Street, Boston, Massachusetts 02116.
FURTHER INFORMATION
The Trust has filed with the Securities and Exchange Commission (the
"Commission"), Washington, DC 20549, a Registration Statement under the
Securities Act with respect to the shares of Municipal Preferred offered hereby.
Further information concerning these securities and the Trust may be found in
the Registration Statement, of which this Prospectus constitutes a part, on file
with the Commission. The Registration Statement may be inspected without charge
at the Commission's office in Washington, DC, and copies of all or any part
thereof may be obtained from such office after payment of the fees prescribed by
the Commission.
The Trust is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and the 1940 Act, and in accordance therewith
files reports and other information with the Commission. Such reports, proxy and
information statements and other information can be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, DC 20549 and the Commission's regional offices, including
offices at Seven World Trade Center, New York, New York 10048. Call
1-202-942-8090 for information about the public reference facilities. Copies of
such material can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, DC 20549 at prescribed rates.
Such reports and other information concerning the Trust may also be inspected at
the offices of the Exchange. The Statement of Additional Information, material
incorporated by reference into this Prospectus and the Statement of Additional
Information, and reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission is also
available on the EDGAR Database on the SEC Internet site at http://www.sec.gov.
In addition, reports, proxy and information statements and other information
concerning the Trust can be inspected at the offices of the Exchange, 20 Broad
Street, New York, New York 10005.
GLOSSARY
" "AA" Composite Commercial Paper Rate," on any date for any Rate Period of
shares of a series of Municipal Preferred, means: (i)(A) in the case of any
Minimum Rate Period or any Special Rate Period of fewer than 49 Rate Period
Days, the interest equivalent of the 30-day rate; provided, however, that if
such Rate Period is a Minimum Rate Period and the "AA" Composite Commercial
Paper Rate is being used to determine the Applicable Rate for shares of such
series when all of the outstanding shares of such series of Municipal Preferred
are subject to Submitted Hold Orders, then the interest equivalent of the
seven-day rate, and (B) in the case of any Special Rate Period of (1) 49 or more
but fewer than 70 Rate Period Days, the interest equivalent of the 60-day rate;
(2) 70 or more but fewer than 85 Rate Period Days, the arithmetic average of the
interest equivalent of the 60-day and 90-day rates; (3) 85 or more but fewer
than 99 Rate Period Days, the interest equivalent of the 90-day rate; (4) 99 or
more but fewer than 120 Rate Period Days, the arithmetic average of the interest
equivalent of the 90-day and 120-day rates; (5) 120 or more but fewer than 141
Rate Period Days, the interest equivalent of the 120-day rate; (6) 141 or more
but fewer than 162 Rate Period Days, the arithmetic average of the interest
equivalent of the 120-day and 180-day rates; and (7) 162 or more but fewer than
183 Rate Period Days, the interest equivalent of the 180-day rate, in each case
on commercial paper placed on behalf of issuers whose corporate bonds are rated
"AA" by Standard & Poor's or the equivalent of such rating by Standard & Poor's
or another rating agency, as made available on a discount basis or otherwise by
the Federal Reserve Bank of New York for the Business Day next preceding such
date; or (ii) in the event that the Federal Reserve Bank of New York does not
make available any such rate, then the arithmetic average of such rates, as
quoted on a discount basis or otherwise, by certain commercial paper dealers to
the Auction Agent for the close of business on the Business Day next preceding
such date.
"Agent Member" means a member of or participant in the Securities Depository
that will act on behalf of a Bidder.
"All Hold Order Rate," with respect to a Rate Period for which an Auction is
held, means the lesser of the Kenny Index (if the Rate Period for which the
Auction is held consists of fewer than 183 Rate Period Days) or the product of
(i)(1) the "AA" Composite Commercial Paper Rate on the Auction Date for such
Rate Period, if such Rate Period consists of fewer than 183 Rate Period Days,
(2) the Treasury Bill Rate on such Auction Date for such Rate Period, if such
Rate Period consists of more than 182 but fewer than 365 Rate Period Days or (3)
the Treasury Note Rate on such Auction Date for such Rate Period, if such Rate
Period is more than 364 Rate Period Days (the rate described in the foregoing
clause (i)(1), (2) or (3), as applicable, being referred to herein as the
"Benchmark Rate"), and (ii) 1 minus the maximum marginal regular Federal
individual income tax rate applicable to ordinary income or the maximum marginal
regular Federal corporate income tax rate applicable to ordinary income,
whichever is greater; provided, however, that if the Trust has notified the
Auction Agent of its intent to allocate to shares of such series of Municipal
Preferred in such Rate Period any net capital gains or other income taxable for
federal income tax purposes ("Taxable Income"), the Applicable Rate on shares of
Municipal Preferred for such Rate Period will be (A) if the Taxable Yield Rate
(as defined below) is greater than the Benchmark Rate, then the Benchmark Rate,
or (B) if the Taxable Yield Rate is less than or equal to the Benchmark Rate,
then the rate equal to the sum of (x) the lesser of the Kenny Index (if such
Rate Period consists of fewer than 183 Rate Period Days) or the product of the
Benchmark Rate multiplied by the factor set forth in the preceding clause (ii)
and (y) the product of the maximum marginal regular Federal individual income
tax rate applicable to ordinary income or the maximum marginal regular Federal
corporate income tax rate applicable to ordinary income, whichever is greater,
multiplied by the Taxable Yield Rate. For purposes of the foregoing, Taxable
Yield Rate means the rate determined by (a) dividing the amount of Taxable
Income available for distribution per share of Municipal Preferred by the number
of days in the Dividend Period in respect of which such Taxable Income is
contemplated to be distributed, (b) multiplying the amount determined in (a)
above by 365 (in the case of a Dividend Period of 7 Rate Period Days) or 360 (in
the case of any other Dividend Period), and (c) dividing the amount determined
in (b) above by $25,000.
"Applicable Rate" means the rate per annum at which dividends are payable on
shares of Municipal Preferred for any Rate Period thereof.
"Auction Agency Agreement" means an agreement between the Trust and the
Auction Agent which provides, among other things, that the Auction Agent will
follow the Auction Procedures for purposes of determining the Applicable Rate
for shares of a series of Municipal Preferred so long as the Applicable Rate for
such shares is to be based on the results of an Auction.
"Auction Agent" means the entity appointed as such by a resolution of the
Board of Trustees.
"Bidder" means a Beneficial Owner or a Potential Beneficial Owner placing an
Order with its Broker-Dealer or an Existing Holder or Potential Holder placing
an order with the Auction Agent or on whose behalf an Order is placed with an
Auction Agent.
"Board of Trustees" means the Board of Trustees of the Trust or any duly
authorized committee thereof.
"Broker-Dealer" means any broker-dealer, commercial bank or other entity
permitted by law to perform the functions required of a Broker-Dealer, that is a
member of, or a participant in, the Securities Depository or is an affiliate of
such member or participant, has been selected by the Trust and has entered into
a Broker-Dealer Agreement that remains effective.
"Broker-Dealer Agreement" means an agreement between the Auction Agent and a
Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the Auction
Procedures.
"Business Day" shall mean a day on which the New York Stock Exchange is open
for trading, and which is neither a Saturday, Sunday nor any other day on which
banks in The City of New York, New York are authorized by law to close.
"Code" means the Internal Revenue Code of 1986, as amended.
"Date of Original Issue" with respect to shares of a series of Municipal
Preferred means the Business Day on which the Trust initially issued such
shares.
"Dividend Payment Date" with respect to shares of a series of Municipal
Preferred means any Business Day on which dividends on shares of such series of
Municipal Preferred are payable as provided under "Description of Municipal
Preferred -- Dividends and Dividend Periods."
"Dividend Period" with respect to shares of a series of Municipal Preferred
means the period from and including the Date of Original Issue of shares of such
series of Municipal Preferred to but excluding the initial Dividend Payment Date
for such shares and any period thereafter from and including one Dividend
Payment Date for such shares to but excluding the next succeeding Dividend
Payment Date for such shares.
"Existing Holder" with respect to shares of a series of Municipal Preferred
means a Broker-Dealer (or any such other person as may be permitted by the
Trust) that is listed on the records of the Auction Agent as a holder of shares
of such series of Municipal Preferred.
"Gross-Up Payment" has the meaning specified under "Dividends and Dividend
Periods - Gross-Up Payments."
"Initial Rate Period" means the period from and including the Date of
Original Issue of shares of Municipal Preferred to but excluding Wednesday,
December 13, 2000 for Series T shares and Friday, December 15, 2000 for Series
TH shares.
"Kenny Index" has the meaning specified under "Taxable Equivalent of the
Short-Term Municipal Bond Rate."
"Maximum Rate" has the meaning specified under "Description of Municipal
Preferred -- Dividends and Dividend Periods" on page 18.
"Minimum Rate Period" means any Rate Period consisting of 7 Rate Period
Days.
"Potential Holder" with respect to shares of a series of Municipal Preferred
means a Broker-Dealer (or any such other person as may be permitted by the
Trust) that is not an Existing Holder of shares of Municipal Preferred or that
is an Existing Holder of such shares that wishes to become the Existing Holder
of additional shares.
"Rate Multiple" with respect to shares of a series of Municipal Preferred
means a percentage, determined as set forth below (depending on whether the
Trust has notified the Auction Agent of its intent to allocate any net capital
gain or other income taxable for Federal income tax purposes to shares of such
series prior to the Auction establishing the Applicable Rate for shares of such
series), based on the prevailing rating of shares of Municipal Preferred in
effect at the close of business on the Business Day next preceding the relevant
Auction Date:
APPLICABLE APPLICABLE
PERCENTAGE -- PERCENTAGE --
PREVAILING RATING NO NOTIFICATION NOTIFICATION
----------------- --------------- ------------
"aa3"/AA- or higher ...................... 110% 150%
"a3"/A- .................................. 125% 160%
"baa3"/BBB- .............................. 150% 250%
"ba3"/BB- ................................ 200% 275%
Below "ba3"/BB- .......................... 250% 300%
"Rate Period" with respect to shares of a series of Municipal Preferred
means the Initial Rate Period of shares of such series of Municipal Preferred
and any Subsequent Rate Period of such shares.
"Rate Period Days," for any Rate Period or Dividend Period, means the number
of days that would constitute such Rate Period or Dividend Period but for either
(i) the shortening or lengthening, as the case may be, of such Rate Period or
Dividend Period as set forth under "Description of Municipal Preferred --
Dividends and Dividend Periods" because the day on which dividends would
otherwise be payable is not a Business Day or (ii) the shortening of such Rate
Period pursuant to the provisions relating to the designation of Special Rate
Periods as set forth in the Statement of Additional Information under
"Description of Municipal Preferred -- Designation of Special Rate Periods."
"Reference Rate" means (i) the higher of the Taxable Equivalent of the
Short-Term Municipal Bond Rate and the "AA" Composite Commercial Paper Rate in
the case of Minimum Rate Periods and Special Rate Periods of 28 Rate Period Days
or fewer; (ii) the "AA" Composite Commercial Paper Rate in the case of Special
Rate Periods of more than 28 Rate Period Days but fewer than 183 Rate Period
Days; and (iii) the Treasury Bill Rate in the case of Special Rate Periods of
more than 182 Rate Period Days but fewer than 365 Rate Period Days.
"Securities Depository" means The Depository Trust Company and its
successors and assigns or any other securities depository selected by the Trust
which agrees to follow the procedures required to be followed by such securities
depository in connection with shares of Municipal Preferred.
"Special Rate Period" with respect to shares of a series of Municipal
Preferred means any Subsequent Rate Period commencing on the date designated by
the Trust, as set forth under "Description of Municipal Preferred -- Designation
of Special Rate Periods," and ending on the last day of the last Dividend Period
thereof.
"Submission Deadline" means 1:30 P.M. New York City time, on any Auction
Date or such other time on any Auction Date by which Broker-Dealers are required
to submit Orders to the Auction Agent as specified by the Auction Agent from
time to time.
"Submitted Bid" means a valid Bid submitted or deemed submitted to the
Auction Agent by a Broker-Dealer by the Submission Deadline.
"Submitted Hold Order" means a valid Hold Order submitted or deemed
submitted to the Auction Agent by a Broker-Dealer by the Submission Deadline.
"Subsequent Rate Period" with respect to shares of a series of Municipal
Preferred means any period from and including the first day following the
Initial Rate Period of shares of such series of Municipal Preferred to but
excluding the next Dividend Payment Date for such shares and any period
thereafter from and including one Dividend Payment Date for such shares to but
excluding the next succeeding Dividend Payment Date for such shares; provided,
however, that if any Subsequent Rate Period is also a Special Rate Period, such
term shall mean the period commencing on the first day of such Special Rate
Period and ending on the last day of the last Dividend Period thereof.
"Taxable Equivalent of the Short-Term Municipal Bond Rate," on any date for
any Minimum Rate Period or Special Rate Period of 28 Rate Period Days or fewer,
means 90% of the quotient of (A) the per annum rate expressed on an interest
equivalent basis equal to the Standard & Poor's Kenny 30-day High Grade Index or
any successor index (the "Kenny Index") (provided, however, that any such
successor index must be approved by Moody's (if Moody's is then rating the
shares of Municipal Preferred) and Standard & Poor's (if Standard & Poor's is
then rating the shares of Municipal Preferred)), made available for the Business
Day immediately preceding such date but in any event not later than 8:30 A.M.,
New York City time, on such date by Standard & Poor's J.J. Kenny Evaluation
Services or any successor thereto, based upon 30-day yield evaluations at par of
short-term bonds the interest on which is excludable for regular federal income
tax purposes under the Code, of "high grade" component issuers selected by
Standard & Poor's J.J. Kenny Evaluation Services or any such successor from time
to time in its discretion, which component issuers shall include, without
limitation, issuers of general obligation bonds but shall exclude any bonds the
interest on which constitutes an item of tax preference under Section 57(a)(5)
of the Code, or successor provisions, for purposes of the "alternative minimum
tax," divided by (B) 1.00 minus the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate applicable to ordinary income (in each case
expressed as a decimal), whichever is greater; provided, however, that if the
Kenny Index is not made so available by 8:30 A.M., New York City time, on such
date by Standard & Poor's J.J. Kenny Evaluation Services or any successor, the
Taxable Equivalent of the Short-Term Municipal Bond Rate shall mean the quotient
of (A) the per annum rate expressed on an interest equivalent basis equal to the
most recent Kenny Index so made available for any preceding Business Day,
divided by (B) 1.00 minus the maximum marginal regular Federal individual income
tax rate applicable to ordinary income or the maximum marginal regular Federal
corporate income tax rate applicable to ordinary income (in each case expressed
as a decimal), whichever is greater.
"Treasury Bill" means a direct obligation of the U.S. Government having a
maturity at the time of issuance of 364 days or less.
"Treasury Bill Rate," on any date for any Rate Period, means: (i) the bond
equivalent yield, calculated in accordance with prevailing industry convention,
of the rate on the most recently auctioned Treasury Bill with a remaining
maturity closest to the length of such Rate Period, as quoted in The Wall Street
Journal on such date for the Business Day next preceding such date; or (ii) in
the event that any such rate is not published in The Wall Street Journal, then
the bond equivalent yield, calculated in accordance with prevailing industry
convention, as calculated by reference to the arithmetic average of the bid
price quotations of the most recently auctioned Treasury Bill with a remaining
maturity closest to the length of such Rate Period, as determined by bid price
quotations as of the close of business on the Business Day immediately preceding
such date obtained from certain U.S. Government securities dealers to the
Auction Agent.
"Treasury Note" means a direct obligation of the U.S. Government having a
maturity at the time of issuance of five years or less but more than 364 days.
"Treasury Note Rate," on any date for any Rate Period, means: (i) the yield
on the most recently auctioned Treasury Note with a remaining maturity closest
to the length of such Rate Period, as quoted in The Wall Street Journal on such
date for the Business Day next preceding such date; or (ii) in the event that
any such rate is not published in The Wall Street Journal, then the yield as
calculated by reference to the arithmetic average of the bid price quotations of
the most recently auctioned Treasury Note with a remaining maturity closest to
the length of such Rate Period, as determined by bid price quotations as of the
close of business on the Business Day immediately preceding such date obtained
from certain U.S. Government securities dealers to the Auction Agent.
APPENDIX
INVESTMENT TECHNIQUES AND PRACTICES
In pursuing its investment objective, the Trust may engage in the following
principal and non-principal techniques and practices. Investment techniques and
practices which are the principal focus of the Trust are also described,
together with their risks, under "Investment Objective and Policies" and "Risk
Factors and Special Considerations" in the Prospectus. Both principal and
non-principal investment techniques and practices are described, together with
their risks in the SAI.
INVESTMENT TECHNIQUES/PRACTICES
<TABLE>
<CAPTION>
INVESTMENT TECHNIQUES/PRACTICES
SYMBOLS x permitted -- not permitted
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Securities Inverse Floating Rate Obligations x
Asset-Backed Securities Investment in Other Investment Companies
Collateralized Mortgage Obligations and Open-End Funds --
Multiclass Pass-Through Securities x Closed-End Funds x
Corporate Asset-Backed Securities x Lending of Portfolio Securities --
Mortgage Pass-Through Securities x Leveraging Transactions
Stripped Mortgage-Backed Securities x Bank Borrowings --*
Corporate Securities x Mortgage "Dollar-Roll" Transactions x**
Loans and Other Direct Indebtedness x Reverse Repurchase Agreements --*
Lower Rated Bonds x Options
Municipal Bonds x Options on Foreign Currencies --*
Speculative Bonds x Options on Futures Contracts --*
U.S. Government Securities x Options on Securities --*
Variable and Floating Rate Obligations x Options on Stock Indices --*
Zero Coupon Bonds, Deferred Reset Options --*
Interest Bonds and PIK Bonds x "Yield Curve" Options --*
Equity Securities x Repurchase Agreements x
Foreign Securities Exposure Restricted Securities x
Brady Bonds -- Short Sales --*
Depositary Receipts -- Short Sales Against the Box --
Dollar-Denominated Foreign Debt Securities -- Short Term Instruments x
Emerging Markets -- Swaps and Related Derivative Instruments x
Foreign Securities -- Temporary Borrowings x
Forward Contracts -- Temporary Defensive Positions x
Futures Contracts x Warrants x
Indexed Securities/Structured Products x "When-Issued" Securities x
</TABLE>
------------
* May only be changed with shareholder approval
** The Trust will only enter into "covered" mortgage dollar-roll transactions,
meaning that the Trust segregates liquid securities it will repurchase and
does not use these transactions as a form of leverage.
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
Page
Use of Proceeds ...................................................... 3
Investment Objective and Policies .................................... 3
Trust Charges and Expenses ........................................... 4
Management of the Trust .............................................. 5
Portfolio Transactions ............................................... 8
Net Asset Value ...................................................... 9
The Auction .......................................................... 9
Description of Municipal Preferred ................................... 19
Repurchase of Common Shares .......................................... 34
Tax Matters .......................................................... 35
Shareholder Liability ................................................ 37
Custodian and Shareholder Servicing Agent ............................ 38
Independent Accountants .............................................. 38
Glossary ............................................................. 38
Financial Statements ................................................. 45
Appendix A -- Description of Investments ............................. A-1
Appendix B -- Ratings of Investments ................................. B-1
Appendix C -- Auction Procedures ..................................... C-1
Appendix D -- Settlement Procedures .................................. D-1
Appendix E -- Rating Agency Futures and Options Restrictions ......... E-1
<PAGE>
===============================================================================
$140,000,000
MFS MUNICIPAL INCOME TRUST
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
2,800 SHARES, SERIES T
2,800 SHARES, SERIES TH
--------
PROSPECTUS
DECEMBER 4, 2000
--------
SALOMON SMITH BARNEY
MFMCE-IRH-11/00-2M
===============================================================================
<PAGE>
Rule 497(h) File Nos. 333-42364 and 811-4841
[Logo] M F S(R)
INVESTMENT MANAGEMENT STATEMENT OF ADDITIONAL
We invented the Mutual fund(R) INFORMATION
DECEMBER 4, 2000
MFS MUNICIPAL INCOME TRUST
This Statement of Additional Information ("SAI") relating to the Series T and
Series TH Municipal Auction Rate Cumulative Preferred shares ("Municipal
Preferred") offered by MFS Municipal Income Trust (the "Trust") contains
information which may be useful to investors but which is not included in the
Prospectus of the Trust. This SAI is not a prospectus and is authorized for
distribution only when accompanied or preceded by the Prospectus of the Trust
dated December 4, 2000, describing the Municipal Preferred (the "Prospectus").
This SAI should be read together with the Prospectus. Investors may obtain a
free copy of the Prospectus by calling Massachusetts Financial Services Company
at 1-800-637-2304. Capitalized terms used but not defined in this SAI have the
meanings ascribed to them in the Prospectus.
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
MFMCE-IRH-11/00 100
<PAGE>
TABLE OF CONTENTS
PAGE
USE OF PROCEEDS ...................................................... 3
INVESTMENT OBJECTIVE AND POLICIES .................................... 3
TRUST CHARGES AND EXPENSES ........................................... 4
MANAGEMENT OF THE TRUST .............................................. 5
PORTFOLIO TRANSACTIONS ............................................... 8
NET ASSET VALUE ...................................................... 9
THE AUCTION .......................................................... 9
DESCRIPTION OF MUNICIPAL PREFERRED ................................... 19
REPURCHASE OF COMMON SHARES .......................................... 34
TAX MATTERS .......................................................... 35
SHAREHOLDER LIABILITY ................................................ 37
CUSTODIAN AND SHAREHOLDER SERVICING AGENT ............................ 38
INDEPENDENT ACCOUNTANTS .............................................. 38
GLOSSARY ............................................................. 38
FINANCIAL STATEMENTS ................................................. 45
APPENDIX A -- Description of Investments ............................. A-1
APPENDIX B -- Ratings of Investments ................................. B-1
APPENDIX C -- Auction Procedures ..................................... C-1
APPENDIX D -- Settlement Procedures .................................. D-1
APPENDIX E -- Rating Agency Futures and Options Restrictions ......... E-1
This Statement of Additional Information is dated December 4, 2000.
<PAGE>
USE OF PROCEEDS
The net proceeds of the offering of shares of Municipal Preferred will be
approximately $138,081,540 after payment of the sales load to Salomon Smith
Barney Inc. (the "Underwriter") and estimated offering costs.
The net proceeds of the offering will be invested as described under "Use of
Proceeds" in the Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
The Trust's Prospectus describes its investment objective and investment
policies. This SAI includes additional information concerning, among other
things, the investment policies of the Trust and information about certain
securities and investment techniques that are described or referred to in the
Prospectus or in which the Trust expects to engage. Except as indicated under
"Fundamental Investment Policies," the Trust's investment policies are not
fundamental and the Trustees may change the policies without shareholder
approval.
FUNDAMENTAL INVESTMENT POLICIES
The Trust has adopted the following policies which cannot be changed without the
approval of the holders of a "majority of the outstanding" Common Shares and
Preferred Shares, including shares of Municipal Preferred, voting together as a
single class, and of the holders of a "majority of the outstanding" Preferred
Shares, including shares of Municipal Preferred, voting as a separate class. A
"majority of the outstanding" shares means the lesser of (i) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares are
represented or (ii) more than 50% of the outstanding shares. All percentage
limitations set forth below apply immediately after a purchase or initial
investment and any subsequent change in any applicable percentage resulting from
market fluctuations does not require elimination of any security from the
portfolio. The Trust may not:
(1) borrow money or pledge, mortgage or hypothecate its assets, except as a
temporary measure for extraordinary or emergency purposes or for a
repurchase of its shares, and in no event in excess of 1/3 of its assets
(the Trust intends to borrow money only from banks);
(2) purchase any security or evidence of interest therein on margin, except
that the Trust may obtain such short-term credit as may be necessary for
the clearance of purchases and sales of securities and except that the
Trust may make deposits on margin in connection with interest rate
futures contracts;
(3) purchase or sell any put or call option or any combination thereof,
provided that this shall not prevent the purchase, ownership, holding or
sale of contracts for the future delivery of fixed income securities;
(4) underwrite securities issued by other persons except insofar as the
Trust may technically be deemed an underwriter under the Securities Act
of 1933 in selling a portfolio security;
(5) purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity
contracts (except contracts for the future acquisition or delivery of
fixed income securities) in the ordinary course of the business of the
Trust (the Trust reserves the freedom of action to hold and to sell real
estate acquired as a result of the ownership of securities);
(6) purchase securities of any issuer if such purchase at the time thereof
would cause more than 10% of the voting securities of such issuer to be
held by the Trust;
(7) issue any senior security (as that term is defined in the Investment
Company Act of 1940 (the "1940 Act"), if such issuance is specifically
prohibited by the 1940 Act or the rules and regulations promulgated
thereunder;
(8) make loans to other persons except through the use of repurchase
agreements, the purchase of commercial paper or the purchase of all or a
portion of an issue of debt securities in accordance with its investment
objective, policies and restrictions, and provided that not more than
10% of the assets of the Trust will be invested in repurchase agreements
maturing in more than seven days.
The requirement that at least 80% of the Trust's assets under normal
circumstances be invested in Municipal Bonds is a fundamental policy. In
addition, subject to these restrictions, the Trust may enter into repurchase
agreements only with member banks of the Federal Reserve System and only
collateralized by U.S. Government securities; however, this operating policy is
not fundamental and may be changed without shareholder approval.
For purposes of the investment restrictions described above and the state
and federal restrictions described below, the issuer of a tax-exempt security is
deemed to be the entity (public or private) ultimately responsible for the
payment of the principal of and interest on the security.
OTHER INVESTMENT POLICIES
In addition to the foregoing restrictions, the Trust will not, as a matter of
operating policy, (i) pledge, mortgage or hypothecate for any purpose in excess
of 15% of its assets (taken at market value), (ii) invest more than 5% of its
total assets at the time of investment in unsecured obligations of issuers
which, including predecessors, controlling persons, general partners and
guarantors, have a record of less than three years' continuous business
operation or relevant business experience, (iii) purchase or retain in its
portfolio any securities issued by an issuer any of whose officers, directors,
trustees or security holders is an officer or Trustee of the Trust, or is a
member, partner, officer or Director of the Adviser if, after the purchase of
the securities of such issuer by the Trust, one or more of such persons owns
beneficially more than 1/2 of 1% of the shares or securities, or both (all taken
at market value), of such issuer and such persons owning more than 1/2 of 1% of
such shares or securities together own beneficially more than 5% of such shares
or securities, or both (all taken at market value), (iv) sell any security which
it does not own unless by virtue of its ownership of other securities the Trust
has at the time of sale a right to obtain securities, without payment of further
consideration, equivalent in kind and amount to the securities sold and provided
that if such right is conditional the sale is made upon the same conditions, (v)
invest for the purpose of exercising control or management, (vi) purchase
securities issued by any registered investment company except by purchase in the
open market where no commission or profit to a sponsor or dealer results from
such purchase other than the customary broker's commission, or except when such
purchase, though not made in the open market, is part of a plan of merger or
consolidation, provided, however, that the Trust shall not purchase the
securities of any registered investment company if such purchase at the time
thereof would cause more than 10% of the total assets of the Trust (taken at
market value) to be invested in the securities of such issuers or would cause
more than 3% of the outstanding voting securities of any such issuer to be held
by the Trust, and provided further, that the Trust shall not purchase securities
issued by any open-end investment company, or (vii) knowingly invest in
securities which are subject to legal or contractual restrictions on resale
(other than repurchase agreements) if, as a result thereof, more than 15% of the
total assets of the Trust (taken at market value) would be so invested. These
policies are not fundamental and may be changed by the Trust without shareholder
approval.
Restrictions imposed by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Ratings Group ("Standard & Poor's"), or both, on engaging in
futures and options transactions as described under "Description of Municipal
Preferred -- Asset Maintenance," are not fundamental policies and may be changed
by the Trust from time to time without shareholder approval; provided, however,
that if Moody's or Standard & Poor's, or both, are rating the shares of
Municipal Preferred, the Trust must receive confirmation from Moody's or
Standard & Poor's, or both, as appropriate, that any such change would not
impair the ratings then assigned by Moody's and Standard & Poor's to shares of
Municipal Preferred. See also "Description of Municipal Preferred -- Rating
Agency Guidelines" for a description of other rating agency restrictions, none
of which is a fundamental policy of the Trust and which may be changed by the
Trust from time to time without shareholder approval subject to the foregoing
proviso.
TRUST CHARGES AND EXPENSES
For the services provided by Massachusetts Financial Services Company ("MFS"
or the "Adviser") under the Advisory Agreement, the Trust pays MFS a fee, as
described under "Management of the Trust - The Adviser" in the Prospectus.
Pursuant to the Registrar, Transfer Agency and Service Agreement with
respect to the Common Shares of the Trust, between the Trust and MFS Service
Center, Inc., for account maintenance, the Trust currently pays MFS Service
Center, Inc. ("MFSC") a fee based on the total number of accounts for all
closed-end funds advised by MFS for which MFSC acts as registrar and transfer
agent. If the total number of accounts is less than 75,000, the annual account
fee is $9.00. If the total number of accounts is 75,000 or more, the annual
account fee is $8.00. For dividend services, MFSC charges $0.75 per dividend
reinvestment and $0.75 per cash infusion. If the total amount of fees related to
dividend services is less than $1,000 per month for all closed-end funds advised
by MFS for which MFSC acts as registrar and transfer agent, the minimum fee for
the Trust for these services will be $167 per month. The Trust will reimburse
MFSC for reasonable out-of-pocket expenses and advances incurred by MFSC and for
any other expenses incurred by MFSC at the request, or with the consent, of the
Trust.
RECENT FEES PAID TO THE ADVISER AND MFSC
YEAR ENDED OCTOBER 31,
------------------------
2000 1999 1998
---- ---- ----
(DOLLARS IN THOUSANDS)
Management fee .................................... $2,733 $2,856 $2,952
Transfer agent fee ................................ $ 94 $ 104 $ 111
BROKERAGE COMMISSIONS
The Trust did not pay any brokerage commissions for the fiscal years ended
October 31, 2000, 1999 and 1998.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The Trustees and officers of the Trust, their ages and their principal
occupations for at least the last five years are set forth below. (Their titles
may have varied during that period.) Unless otherwise noted, the address of each
Trustee and officer is 500 Boylston Street, Boston, Massachusetts 02116.
Trustees and officers who are "interested persons" of the Trust, as defined in
the 1940 Act, are denoted by an asterisk (*). The Board of Trustees is divided
into three classes, each class having a term of three years ending with the
annual meeting of shareholders (or any adjournment thereof) held in the year of
expiration, or until the election of a successor. Each year, the term of office
of one class expires: Mr. Schmidt will continue in office until 2001; Messrs.
Poorvu and Stone and Ms. Smith will continue in office until 2002; and Messrs.
Ives, Perera, Scott and Shames will continue in office until 2003.
TRUSTEES AND OFFICERS
JEFFREY L. SHAMES*, (born 6/2/55) Trustee, Chairman and President
Chairman and President; Massachusetts Financial Services Company, Chairman and
Chief Executive Officer.
J. ATWOOD IVES, (born 5/1/36) Trustee
Private investor; Eastern Enterprises (diversified services company),
Chairman, Trustee and Chief Executive Officer (until November 2000); KeySpan
Corporation (energy related services), Director.
LAWRENCE T. PERERA, (born 6/23/35) Trustee
Hemenway & Barnes (attorneys), Partner.
WILLIAM J. POORVU, (born 4/10/35) Trustee
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL & Associates Properties, Inc. (real estate investment trust),
Director; The Baupost Fund (a mutual fund), Vice Chairman and Trustee.
CHARLES W. SCHMIDT, (born 3/18/28) Trustee
Private investor; IT Group, Inc. (diversified environmental services and
consulting), Director.
ARNOLD D. SCOTT*, (born 12/16/42) Trustee
Massachusetts Financial Services Company, Senior Executive Vice President and
Director.
ELAINE R. SMITH, (born 4/25/46) Trustee
Independent consultant.
DAVID B. STONE, (born 9/2/27) Trustee
North American Management Corp. (Investment Adviser), Chairman and Director.
STEPHEN E. CAVAN*, (born 11/6/53) Secretary and Clerk
Massachusetts Financial Services Company, Senior Vice President, General
Counsel and Secretary.
JAMES R. BORDEWICK, JR.*, (born 3/6/59) Assistant Secretary and Assistant
Clerk
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
JAMES O. YOST*, (born 6/12/60) Treasurer
Massachusetts Financial Services Company, Senior Vice President.
ROBERT R. FLAHERTY*, (born 9/18/63) Assistant Treasurer
Massachusetts Financial Services Company, Vice President (since August 2000),
UAM Fund Services, Senior Vice President (since 1996), Chase Global Fund
Services, Vice President (1995 to 1996).
LAURA F. HEALY*, (born 3/20/64) Assistant Treasurer
Massachusetts Financial Services Company, Vice President (since December
1996), State Street Bank Fund Administration Group, Assistant Vice President
(prior to December 1996).
ELLEN MOYNIHAN*, (born 11/13/57) Assistant Treasurer
Massachusetts Financial Services Company, Vice President (since September,
1996); Deloitte & Touche LLP, Senior Manager (until September 1996).
MARK E. BRADLEY*, (born 11/23/59) Assistant Treasurer
Massachusetts Financial Services Company, Vice President (since March, 1997);
Putnam Investments, Vice President (prior to March 1997).
Each Trustee and officer holds comparable positions with certain MFS
affiliates or with certain other funds of which MFS or a subsidiary of MFS is
the investment adviser or distributor.
All Trustees serve as Trustees of 38 funds within the MFS fund complex
advised by MFS, investment adviser to the Trust, except for Mr. Scott, who
serves as Trustee of 79 funds within the MFS fund complex, and Mr. Shames, who
serves as Trustee of 108 funds within the MFS fund complex. Messrs. Scott and
Shames are "interested persons" (as defined under the 1940 Act) of the Trust
because they are each an officer and director of MFS; Messrs. Scott and Shames
each own shares of common stock of MFS.
At the next annual meeting of the Trust's shareholders, holders of
outstanding shares of Municipal Preferred, voting together as one separate
class, will elect two trustees, and holders of outstanding Common Shares and
shares of Municipal Preferred, voting together as a single class, will elect one
trustee. See "Description of Municipal Preferred -- Voting Rights."
The Trust pays each Trustee who is not an officer of the Adviser a fee of
$7,000 per year plus $400 per meeting and $400 per committee meeting attended,
together with such Trustee's actual out-of-pocket expenses relating to
attendance at meetings. In addition, each Trustee who is not an officer of the
Adviser will be entitled to receive certain benefits pursuant to the Trust's
retirement plan. Under this plan, each such Trustee (or his or her
beneficiaries) will be entitled to receive an annual retirement or death benefit
in an amount of up to a maximum of 50% of such Trustee's average annual
compensation, depending on the Trustee's length of service.
TRUSTEES AND TRUSTEES' FEES
Set forth below is certain information concerning the cash compensation paid
to these Trustees and benefits accrued, and estimated benefits payable, under
the retirement plan.
<TABLE>
<CAPTION>
RETIREMENT TOTAL
BENEFIT TRUSTEE
TRUSTEE ACCRUED ESTIMATED FEES FROM
FEES AS PART CREDITED TRUST
FROM OF TRUST YEARS OF AND FUND
TRUSTEE TRUST(1) EXPENSE(1) SERVICE(2) COMPLEX(3)
------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
J. Atwood Ives ................................................. $13,367 $4,876 17 $132,623
Lawrence T. Perera ............................................. $13,367 $6,094 21 $144,098
William J. Poorvu .............................................. $13,367 $6,161 21 $141,338
Charles W. Schmidt ............................................. $13,367 $6,161 14 $137,678
Arnold D. Scott ................................................ 0 0 N/A 0
Jeffrey L. Shames .............................................. 0 0 N/A 0
Elaine R. Smith ................................................ $13,367 $5,356 27 $144,098
David B. Stone ................................................. $15,767 $6,961 12 $151,418
------------
(1) For fiscal year ended October 31, 1999.
(2) Based on normal retirement age of 73 (age 74 for Mr. Stone).
(3) For calendar year 1999. All Trustees receiving compensation served as Trustees of 34 funds within the MFS fund complex (having
aggregate net assets at December 31, 1999, of approximately $58.6 billion).
ESTIMATED ANNUAL BENEFITS PAYABLE BY
THE TRUST UPON RETIREMENT(4)
<CAPTION>
AVERAGE YEARS OF SERVICE
TRUSTEE ----------------------------------------------------------------------------------
FEES 3 5 7 10 OR MORE
---- --- --- --- ----------
<S> <C> <C> <C> <C>
$12,030 $1,805 $3,008 $4,211 $6,015
$13,093 $1,964 $3,273 $4,583 $6,546
$14,156 $2,123 $3,539 $4,954 $7,078
$15,218 $2,283 $3,805 $5,326 $7,609
$16,281 $2,442 $4,070 $5,698 $8,141
$17,344 $2,602 $4,336 $6,070 $8,672
------------
(4) Other funds in the MFS fund complex provide similar retirement benefits to the Trustees.
</TABLE>
In addition to the provisions discussed in the Prospectus under "Certain
Provisions in the Declaration of Trust," the Declaration provides that the
obligations of the Trust are not binding upon the Trustees of the Trust
individually, but only upon the assets and property of the Trust. The
Declaration also provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust but that
such indemnification will not relieve any officer or Trustee of any liability to
the Trust or its shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of his or her duties. The Trust, at its
expense, provides liability insurance for the benefit of its Trustees and
officers.
As of November 20, 2000, all Trustees and officers as a group owned less
than 1% of the outstanding shares of the Trust. As of the same date, the Trust
did not have knowledge of any shareholder holding 5% or more of the outstanding
shares of the Trust.
INVESTMENT ADVISER
MFS, a Delaware corporation, is the Trust's Adviser. The principal business
address of MFS is 500 Boylston Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser to each of the funds in the MFS Family
of Funds (the "MFS Funds"), to MFS Intermediate Income Trust, MFS Government
Markets Income Trust, MFS Multimarket Income Trust, MFS Charter Income Trust,
MFS Special Value Trust, MFS Institutional Trust, MFS Variable Insurance Trust,
Sun Growth Variable Annuity Fund, Inc., MFS/Sun Life Series Trust and seven
variable accounts, each of which is a registered investment company established
by Sun Life of Canada (U.S.) in connection with the sale of Compass-2 and
Compass-3 combination fixed/variable annuity contracts. MFS and its wholly-owned
subsidiary, MFS Institutional Advisers, Inc., provide investment advice to
substantial private clients. Net assets under the management of the MFS
organization were approximately $151.19 billion on behalf of approximately 5.1
million investors as of June 30, 2000. As of such date, the MFS organization
managed approximately $5.2 billion of assets in municipal obligations.
Michael Roberge, a Senior Vice President of MFS, has been the portfolio
manager of the Fund since December, 1997.
GENERAL. The Investment Advisory Agreement between MFS and the Trust (the
"Advisory Agreement") provides that, subject to the direction of the Board of
Trustees of the Trust, MFS is responsible for the actual management of the
Trust's portfolio. The responsibility for making decisions to buy, sell or hold
a particular security rests with the Adviser, subject to review by the Board of
Trustees. The Adviser also provides certain administrative services and general
office facilities.
The Adviser is not dependent on any other party in providing the investment
advisory services required in the management of the Trust. The Adviser may,
however, consider analyses from various sources, including broker-dealers with
which the Trust does business.
The Adviser pays the compensation of the Trust's officers and of the
Trustees who are affiliated with the Adviser. The Adviser also furnishes at its
own expense all necessary administrative services, including office space,
equipment, clerical personnel, investment advisory facilities and all executive
and supervisory personnel necessary for managing the Trust's investments,
effecting the Trust's portfolio transactions and, in general, administrating its
affairs.
The Advisory Agreement also provides that neither MFS or its personnel shall
be liable for any error of judgment or mistake of law or for any loss arising
out of any investment or for any act or omission in the execution and management
of the Trust, except for willful misfeasance, bad faith or gross negligence in
the performance of its or their duties or by reason of reckless disregard of its
or their obligations and duties under the Advisory Agreement.
ADVISORY FEE. For the services provided by MFS under the Advisory Agreement, the
Trust pays it a fee computed and paid monthly in an amount equal to the sum of
0.4% of the average daily net assets of the Trust and 6.32% of the gross income
(i.e., income other than gains from the sale of securities or gains received
from futures contracts) of the Trust, in each case on an annualized basis, for
the Trust's then-current fiscal year. This advisory fee may be higher than that
paid by funds with similar investment objectives.
PAYMENT OF EXPENSES. The Trust pays the compensation of the six Trustees who are
not affiliated with MFS and all the Trust's expenses (other than those assumed
by MFS), including governmental fees, interest charges, taxes, membership dues
in the Investment Company Institute allocable to the Trust, fees and expenses of
independent auditors, of legal counsel, and of any transfer agent, registrar or
dividend disbursing agent of the Trust, to MFS as administrator to the Trust,
expenses of repurchasing shares, expenses of preparing, printing and mailing
share certificates, shareholder reports, notices, proxy statements and reports
to governmental officers and commissions, brokerage and other expenses connected
with the execution, recording and settlement of portfolio security transactions,
insurance premiums, fees and expenses of the Trust's custodian, for all services
to the Trust, including safekeeping of funds and securities and maintaining
required books and accounts, expenses of calculating the net asset value of the
Trust's shares, expenses of shareholder meetings, expenses in connection with
the Dividend Reinvestment and Cash Purchase Plan relating to the Common Shares
of the Trust and Securities and Exchange Commission ("SEC") fees.
USE OF NAME. The Advisory Agreement provides that if MFS ceases to serve as the
Adviser to the Trust, the Trust will change its name so as to delete the
initials "MFS" and that MFS may render services to others and may permit fund
clients in addition to the Trust to use the initials "MFS" in their names.
The Advisory Agreement will continue in effect only if such continuance is
specifically approved at least annually by the Board of Trustees or by vote of a
majority of the Trust's outstanding voting securities and, in either case, by a
majority of the Trustees who are not parties to the Advisory Agreement or
interested persons of any such party. The Advisory Agreement terminates
automatically if it is assigned and may be terminated without penalty by vote of
a majority of the Trust's outstanding voting securities or by either party on
not more than 60 days' nor less than 30 days' written notice.
CODES OF ETHICS
The Trust, the Adviser and the Underwriter have adopted codes of ethics as
required under the 1940 Act. Subject to certain conditions and restrictions,
these codes permit personnel subject to the codes to invest in securities for
their own accounts, including securities that may be purchased, held or sold by
the Trust. Securities transactions by some of these persons may be subject to
prior approval of the Adviser's Compliance Department. Securities transactions
of certain personnel are subject to quarterly reporting and review requirements.
These codes of ethics can be reviewed and copied at the SEC's Public Reference
Room in Washington, D.C. Information on the operation of the Public Reference
Room may be obtained by calling the Commission at 1-202-942-8090. These codes of
ethics also are available on the EDGAR Database on the SEC's Internet site at
http://www.sec.gov, and copies of these codes of ethics may be obtained, after
paying a duplicating fee, by electronic request at the following e-mail address:
[email protected], or by writing the SEC's Public Reference Section,
Washington, D.C. 20549-0102.
PORTFOLIO TRANSACTIONS
Specific decisions to purchase or sell securities for the Trust are made by
the Trust's portfolio manager who is an employee of MFS and who is appointed and
supervised by its senior officers. The portfolio manager may serve other clients
of the Trust's Adviser or any subsidiary of the Adviser in a similar capacity.
The primary consideration in portfolio security transactions is execution at
the most favorable prices. The Adviser has complete freedom as to the markets in
and the broker-dealers through which it seeks this result. Municipal Bonds and
other debt securities are traded principally in the over-the-counter market on
a net basis through dealers acting for their own account and not as brokers. The
cost of securities purchased from underwriters includes an underwriter's
commission or concession, and the prices at which securities are purchased and
sold from and to dealers include a dealer's mark-up or mark-down. The Adviser
normally seeks to deal directly with the primary market makers, unless in its
opinion, better execution is available elsewhere. Subject to the requirement of
seeking execution at the most favorable price, securities may, as authorized by
the Advisory Agreement, be bought from or sold to dealers who have furnished
statistical, research and other information or services to the Adviser or who
have sold shares of funds for which MFS serves as investment adviser. At present
no arrangements to recapture commission payments are in effect.
In certain instances, there may be securities which are suitable for the
Trust's portfolio as well as for that of one or more of the other clients of the
Trust's Adviser or any subsidiary of the Adviser. Investment decisions for the
Trust and for the Adviser's other clients are made with a view to achieving
their respective investment objectives. It may develop that a particular
security is bought or sold for only one client even though it might be held by,
or bought or sold for, other clients. Likewise, a particular security may be
bought for one or more clients when one or more other clients are selling that
same security. Some simultaneous transactions are inevitable when several
clients receive investment advice from the same investment adviser, particularly
when the same security is suitable for the investment objectives of more than
one client. When two or more clients are simultaneously engaged in the purchase
or sale of the same security, the securities are allocated among clients in a
manner believed to be equitable to each. It is recognized that in some cases
this system could have a detrimental effect on the price or volume of the
security as far as the Trust is concerned. In other cases, however, it is
believed that the ability of the Trust to participate in volume transactions
will produce better executions for the Trust.
For the fiscal years ended October 31, 1998, 1999 and 2000, the Trust paid
no brokerage commissions for the execution of portfolio transactions. The rates
of portfolio turnover for each of the fiscal years ended October 31, 1998, 1999
and 2000 were 12%, 15% and 18%, respectively.
NET ASSET VALUE
Net asset value of the Trust will be determined no less frequently than as
of the close of regular trading on the New York Stock Exchange (the "Exchange")
(generally 4:00 p.m. New York City time) on the last Business Day of each week
(generally Friday), and at such other times as the Trust may authorize. The net
asset value of the Trust equals the value of the Trust's assets less the Trust's
liabilities. Debt securities (other than short-term obligations which mature in
60 days or less), including listed issues, are valued on the basis of valuations
furnished by dealers or by a Pricing Service with consideration to factors such
as institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics, and other market
data, without exclusive reliance upon exchange or over-the-counter prices.
Short-term obligations, which mature in 60 days or less, are valued at amortized
cost, which approximates market value. Securities for which there are no such
quotations are valued at fair value as determined in good faith by or at the
direction of the Trustees.
In determining net asset value for the Trust, the Trust's custodian utilizes
the valuations of portfolio securities furnished by a Pricing Service approved
by the Board of Trustees. Securities for which quotations are not readily
available are valued at fair value as determined by the Pricing Service using
methods which include consideration of the following: yields or prices of
municipal bonds of comparable quality, type of issue, coupon, maturity and
rating; indications as to value from dealers; and general market conditions. The
Pricing Service may employ electronic data processing techniques or a matrix
system, or both, to determine valuations. The procedures of the Pricing Service
and its valuations are reviewed by the officers of the Trust under the general
supervision of the Board of Trustees.
THE AUCTION
GENERAL
The Statement creating the Municipal Preferred shares (the "Statement"),
provides that the Applicable Rate for each Rate Period of Municipal Preferred
after the Initial Rate Period therefor shall be equal to the rate per annum that
the Auction Agent advises has resulted on the Business Day preceding the first
day of such Subsequent Rate Period (an "Auction Date") from implementation of
the auction procedures (the "Auction Procedures") set forth in the Statement and
summarized below, in which persons determine to hold or offer to sell or, based
on dividend rates bid by them, offer to purchase or sell such shares. Each
periodic implementation of the Auction Procedures is referred to herein as an
"Auction." The following summary is qualified by reference to the Auction
Procedures set forth in the Statement.
As used herein with respect to shares of Municipal Preferred, (i)
"Applicable Rate" means the rate per annum at which dividends are payable on
such shares for any Rate Period thereof, (ii) "Beneficial Owner" means a
customer of a Broker-Dealer who is listed on the records of that Broker-Dealer
(or, if applicable, the Auction Agent) as a holder of such shares, (iii)
"Business Day" means a day on which the New York Stock Exchange is open for
trading and is not a Saturday, Sunday or other day on which banks in New York
City are authorized by law to close, (iv) "Date of Original Issue" means the
date on which the Trust initially issued such shares, (v) "Dividend Payment
Date" means any date on which dividends on such shares are payable as provided
under "Description of Municipal Preferred -- Dividends -- General," (vi)
"Dividend Period" means the period from and including the Date of Original Issue
of such shares to but excluding the initial Dividend Payment Date for such
shares and any period thereafter from and including one Dividend Payment Date
for such shares to but excluding the next succeeding Dividend Payment Date for
such shares, (vii) "Existing Holder" means a Broker-Dealer (or any such other
Person as may be permitted by the Trust) that is listed on the records of the
Auction Agent as a holder of such shares, (viii) "Initial Rate Period" means the
period from and including the Date of Original Issue of such shares to but
excluding the initial Dividend Payment Date for such shares, (ix) "Potential
Beneficial Owner" means a customer of a Broker-Dealer that is not a Beneficial
Owner of such shares that wishes to purchase such shares, or that is a
Beneficial Owner that wishes to purchase additional such shares, (x) "Potential
Holder" means a Broker-Dealer (or any such other Person as may be permitted by
the Trust) that is not an Existing Holder of such shares or that is an Existing
Holder of such shares that wishes to become the Existing Holder of additional
such shares, (xi) "Rate Period" means the Initial Rate Period of such shares and
any Subsequent Rate Period, including any Special Rate Period, of such shares,
(xii) "Subsequent Rate Period" means any period from and including the first day
following the Initial Rate Period of such shares to but excluding the next
Dividend Payment Date for such shares and any period thereafter from and
including one Dividend Payment Date for such shares to but excluding the next
succeeding Dividend Payment Date for such shares; provided, however, that if any
Subsequent Rate Period is also a Special Rate Period, such term shall mean the
period commencing on the first day of such Special Rate Period and ending on the
last day of the last Dividend Period thereof, (xiii) "Minimum Rate Period" means
any Rate Period consisting of 7 Rate Period Days and (xiv) "Special Rate Period"
means any Subsequent Rate Period commencing on the date designated by the Trust,
as set forth under "Description of Municipal Preferred -- Dividends --
Designation of Special Rate Periods," and ending on the last day of the last
Dividend Period thereof.
AUCTION AGENCY AGREEMENT. The Trust will enter into an agreement (the "Auction
Agency Agreement") with Bankers Trust Company (together with any successor bank
or trust company or other entity entering into a similar agreement with the
Trust, the "Auction Agent") which provides, among other things, that the Auction
Agent will follow the Auction Procedures for purposes of determining the
Applicable Rate for shares of Municipal Preferred so long as the Applicable Rate
for such shares is to be based on the results of an Auction.
BROKER-DEALER AGREEMENTS. Each Auction requires the participation of one or more
broker-dealers. The Auction Agent will enter into an agreement with Salomon
Smith Barney Inc., and may enter into similar agreements (collectively, the
"Broker-Dealer Agreements") with one or more additional broker-dealers
(collectively, the "Broker-Dealers") selected by the Trust, which provide for
the participation of Broker-Dealers in Auctions. See "Broker-Dealers" below.
SECURITIES DEPOSITORY. The Depository Trust Company ("DTC," together with any
successor securities depository selected by the Trust, the "Securities
Depository") will act as the Securities Depository for the Agent Members with
respect to shares of Municipal Preferred. One certificate for each Series of the
shares of Municipal Preferred will be registered in the name of Cede & Co.
("Cede"), as nominee of the Securities Depository. Each certificate will bear a
legend to the effect that such certificate is issued subject to the provisions
restricting transfers of shares of Municipal Preferred contained in the
Statement. The Trust will also issue stop-transfer instructions to the transfer
agent for shares of Municipal Preferred. Prior to the commencement of the right
of holders of Preferred Shares to elect a majority of the Trust's trustees, as
described below under "Description of Municipal Preferred -- Voting Rights,"
Cede will be the holder of record of all shares of Municipal Preferred, and
owners of shares of Municipal Preferred will not be entitled to receive
certificates representing their ownership interest in such shares.
DTC, a New York-chartered limited purpose trust company, performs services
for its participants (including the Agent Members), some of whom (and/or their
representatives) own DTC. DTC maintains lists of its participants and will
maintain the positions (ownership interests) held by each such participant (the
"Agent Member") in shares of Municipal Preferred, whether for its own account or
as a nominee for another person.
AUCTION DATES; ADVANCE NOTICE OF ALLOCATION OF TAXABLE INCOME
The first Auction for shares of Series T Municipal Preferred will be held on
Tuesday, December 12, 2000, the Business Day preceding the Dividend Payment Date
for the Initial Rate Period of Series T shares of Municipal Preferred. The first
Auction for shares of Series TH Municipal Preferred will be held on Thursday,
December 14, 2000, the Business Day preceding the Dividend Payment Date for the
Initial Rate Period of Series TH shares of Municipal Preferred. See "Description
of Municipal Preferred -- Dividends." Thereafter, Auctions will normally be held
every Tuesday for Series T Municipal Preferred, and each Subsequent Rate Period
will normally begin on the following Wednesday, and every Thursday for Series TH
Municipal Preferred, and each Subsequent Rate Period will normally begin on the
following Friday, unless the then-current Rate Period is a Special Rate Period
or, in certain circumstances, the day that would normally be the Auction Date or
the first day of such Subsequent Rate Period is not a Business Day. The Auction
Date and the first day of the related Rate Period (also a Dividend Payment Date)
must be Business Days but need not be consecutive days. See "Description of
Municipal Preferred -- Dividends" for information concerning the circumstances
under which the first day of a Rate Period or the Auction Date, or both, may be
moved to a date other than such specified days.
Except as noted below, whenever the Trust intends to include any net capital
gain or other income taxable for federal income tax purposes in any dividend on
shares of Municipal Preferred, the Trust shall, in the case of Minimum Rate
Periods or Special Rate Periods of 28 Rate Period Days or fewer, and may, in the
case of any other Special Rate Period, notify the Auction Agent of the amount to
be so included not later than the Dividend Payment Date next preceding the
Auction Date on which the Applicable Rate for such dividend is to be
established. Whenever the Auction Agent receives such notice from the Trust, it
will be required in turn to notify each Broker-Dealer, who, on or prior to such
Auction Date, in accordance with its Broker-Dealer Agreement, will be required
to notify its customers who are Beneficial Owners and Potential Beneficial
Owners believed by it to be interested in submitting an Order in the Auction to
be held on such Auction Date. The Trust may also include such net capital gain
or other income taxable for federal income tax purposes in a dividend on shares
of Municipal Preferred without giving advance notice if the dividend is
increased by a Gross-Up Payment. The Trust must notify the Auction Agent of the
additional amounts to be included in such dividend at least five Business Days
prior to the applicable Dividend Payment Date. See also "Description of
Municipal Preferred -- Dividends -- Gross-up Payments" below.
ORDERS BY EXISTING HOLDERS AND POTENTIAL HOLDERS
Prior to the Submission Deadline (as defined under "Submission of Orders by
Broker-Dealers to Auction Agent" below) on each Auction Date for shares of
Municipal Preferred:
(a) each Beneficial Owner of such shares may submit to its Broker-Dealer
by telephone or otherwise a:
(i) "Hold Order" -- indicating the number of outstanding shares of
Municipal Preferred, if any, that such Beneficial Owner desires to
continue to hold without regard to the Applicable Rate for such shares
for the next succeeding Rate Period;
(ii) "Bid" -- indicating the number of outstanding shares of
Municipal Preferred, if any, that such Beneficial Owner offers to sell
if the Applicable Rate for such shares for the next succeeding Rate
Period shall be less than the rate per annum specified by such
Beneficial Owner in such bid; and/or
(iii) "Sell Order" -- indicating the number of outstanding shares of
Municipal Preferred, if any, that such Beneficial Owner offers to sell
without regard to the Applicable Rate for such shares for the next
succeeding Rate Period; and
(b) Broker-Dealers shall contact customers who are Potential Beneficial
Owners by telephone or otherwise to determine whether such customers desire
to submit Bids, in which they will indicate the number of shares of
Municipal Preferred that they offer to purchase if the Applicable Rate for
such shares for the next succeeding Rate Period is not less than the rate
per annum specified in such Bids.
The communication to a Broker-Dealer of the foregoing information is herein
referred to as an "Order" and collectively as "Orders." A Beneficial Owner or a
Potential Beneficial Owner placing an Order with its Broker-Dealer, and such
Broker-Dealer placing an Order with the Auction Agent, is herein referred to as
a "Bidder" and collectively as "Bidders." The submission by a Broker-Dealer of
an Order to the Auction Agent shall likewise be referred to herein as an "Order"
and collectively as "Orders," and an Existing Holder or Potential Holder who
places an Order with the Auction Agent or on whose behalf an Order is placed
with the Auction Agent shall likewise be referred to herein as a "Bidder" and
collectively as "Bidders."
A Beneficial Owner may submit different types of Orders to its Broker-Dealer
with respect to shares of Municipal Preferred then held by such Beneficial
Owner. A Bid placed by a Beneficial Owner specifying a rate higher than the
Applicable Rate determined in the Auction shall constitute an irrevocable offer
to sell the shares subject thereto. A Beneficial Owner that submits a Bid to its
Broker-Dealer having a rate higher than the Maximum Rate on the Auction Date
thereof will be treated as having submitted a Sell Order to its Broker-Dealer. A
Beneficial Owner that fails to submit to its Broker-Dealer prior to the
Submission Deadline for shares of Municipal Preferred an Order or Orders
covering all the outstanding shares of Municipal Preferred held by such
Beneficial Owner will be deemed to have submitted a Hold Order to its
Broker-Dealer covering the number of outstanding shares of Municipal Preferred
held by such Beneficial Owner and not subject to Orders submitted to its
Broker-Dealer; provided, however, that if a Beneficial Owner fails to submit to
its Broker-Dealer prior to the Submission Deadline for shares of Municipal
Preferred an Order or Orders covering all of the outstanding shares of Municipal
Preferred held by such Beneficial Owner for an Auction relating to a Special
Rate Period consisting of more than 28 Rate Period Days, such Beneficial Owner
will be deemed to have submitted a Sell Order to its Broker-Dealer covering the
number of outstanding shares of Municipal Preferred held by such Beneficial
Owner and not subject to Orders submitted to its Broker-Dealer. A Sell Order
shall constitute an irrevocable offer to sell the shares of Municipal Preferred
subject thereto at a price per share equal to $25,000. A Beneficial Owner of
shares of Municipal Preferred that offers to become the Beneficial Owner of
additional shares of Municipal Preferred is, for purposes of such offer, a
Potential Beneficial Owner.
A Potential Beneficial Owner of shares of Municipal Preferred may submit to
its Broker-Dealer Bids in which it offers to purchase shares of Municipal
Preferred if the Applicable Rate for the next Rate Period is not less than the
rate specified in such Bid. A Bid placed by a Potential Beneficial Owner
specifying a rate not higher than the Maximum Rate shall constitute an
irrevocable offer to purchase the number of shares of Municipal Preferred
specified in such Bid if the rate determined in the Auction is equal to or
greater than the rate specified in such Bid.
As described more fully below under "Submission of Orders by Broker-Dealers
to Auction Agent," the Broker-Dealers will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves (unless otherwise permitted by the Trust)
as Existing Holders in respect of shares subject to Orders submitted or deemed
submitted to them by Beneficial Owners and as Potential Holders in respect of
shares subject to Orders submitted to them by Potential Beneficial Owners.
However, neither the Trust nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with the foregoing. Any Order placed with the
Auction Agent by a Broker-Dealer as or on behalf of an Existing Holder or a
Potential Holder will be treated in the same manner as an Order placed with a
Broker-Dealer by a Beneficial Owner or a Potential Beneficial Owner, as
described in the preceding paragraph. Similarly, any failure by a Broker-Dealer
to submit to the Auction Agent an Order in respect of any shares of Municipal
Preferred held by it or its customers who are Beneficial Owners will be treated
in the same manner as a Beneficial Owner's failure to submit to its
Broker-Dealer an Order in respect of shares of Municipal Preferred held by it,
as described in the second preceding paragraph. For information concerning the
priority given to different types of Orders placed by Existing Holders, see
"Submission of Orders by Broker-Dealers to Auction Agent" below.
Neither the Trust nor an affiliate may submit an Order in any Auction,
except that any Broker-Dealer that is an affiliate of the Trust may submit
Orders in an Auction, but only if such Orders are not for its own account.
The Auction Procedures include a pro rata allocation of shares for purchase
and sale, which may result in an Existing Holder continuing to hold or selling,
or a Potential Holder purchasing, a number of shares of Municipal Preferred that
is fewer than the number of shares of Municipal Preferred specified in its
Order. See "Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
and Allocation of Shares" below. To the extent the allocation procedures have
that result, Broker-Dealers that have designated themselves as Existing Holders
or Potential Holders in respect of customer Orders will be required to make
appropriate pro rata allocations among their respective customers. Each purchase
or sale shall be made for settlement on the Business Day next succeeding the
Auction Date at a price per share equal to $25,000. See "Notification of
Results; Settlement" below.
As described above, any Bid specifying a rate higher than the Maximum Rate
(as defined below) will (i) be treated as a Sell Order if submitted by a
Beneficial Owner or an Existing Holder and (ii) not be accepted if submitted by
a Potential Beneficial Owner or a Potential Holder. Accordingly, the Auction
Procedures establish the Maximum Rate as a maximum rate per annum that can
result from an Auction. See "Determination of Sufficient Clearing Bids, Winning
Bid Rate and Applicable Rate" and "Acceptance and Rejection of Submitted Bids
and Submitted Sell Orders and Allocation of Shares" below.
As used herein, "Maximum Rate," when used with respect to shares of
Municipal Preferred on an Auction Date, means:
(i) in the case of any Auction Date which is not the Auction Date
immediately prior to the first day of any proposed Special Rate Period, the
product of (1) the Reference Rate on such Auction Date for the next Rate
Period and (2) the Rate Multiple on such Auction Date, unless such shares
have or had a Special Rate Period (other than a Special Rate Period of 28
Rate Period Days or fewer) and an Auction at which Sufficient Clearing Bids
existed has not yet occurred for a Minimum Rate Period after such Special
Rate Period, in which case the higher of:
(A) the dividend rate on such shares for the then-ending Rate
Period; and
(B) the product of (x) the higher of (I) the Reference Rate on such
Auction Date for a Rate Period equal in length to the then-ending Rate
Period, if such then-ending Rate Period was 364 Rate Period Days or
fewer, or the Treasury Note Rate on such Auction Date for a Rate Period
equal in length to the then-ending Rate Period, if such then-ending
Rate Period was more than 364 Rate Period Days, and (II) the Reference
Rate on such Auction Date for a Rate Period equal in length to such
Special Rate Period, if such Special Rate Period was 364 Rate Period
Days or fewer, or the Treasury Note Rate on such Auction Date for a Rate
Period equal in length to such Special Rate Period, if such Special Rate
Period was more than 364 Rate Period Days and (y) the Rate Multiple on
such Auction Date; or
(ii) in the case of any Auction Date which is the Auction Date
immediately prior to the first day of any proposed Special Rate Period, the
product of (1) the highest of (x) the Reference Rate on such Auction Date
for a Rate Period equal in length to the then-ending Rate Period, if such
then-ending Rate Period was 364 Rate Period Days or fewer, or the Treasury
Note Rate on such Auction Date for a Rate Period equal in length to the
then-ending Rate Period, if such then-ending Rate Period was more than 364
Rate Period Days, (y) the Reference Rate on such Auction Date for the
Special Rate Period for which the Auction is being held if such Special Rate
Period is 364 Rate Period Days or fewer or the Treasury Note Rate on such
Auction Date for the Special Rate Period for which the Auction is being held
if such Special Rate Period is more than 364 Rate Period Days, and (z) the
Reference Rate on such Auction Date for Minimum Rate Periods and (2) the
Rate Multiple on such Auction Date.
As used herein, "Reference Rate" shall mean (i) the higher of the Taxable
Equivalent of the Short-Term Municipal Bond Rate and the "AA" Composite
Commercial Paper Rate in the case of Minimum Rate Periods and Special Rate
Periods of 28 Rate Period Days or fewer; (ii) the "AA" Composite Commercial
Paper Rate in the case of Special Rate Periods of more than 28 Rate Period Days
but fewer than 183 Rate Period Days; and (iii) the Treasury Bill Rate in the
case of Special Rate Periods of more than 182 Rate Period Days but fewer than
365 Rate Period Days.
As used herein, "Taxable Equivalent of the Short-Term Municipal Bond Rate,"
on any date for any Minimum Rate Period or Special Rate Period of 28 Rate Period
Days or fewer, shall mean 90% of the quotient of (A) the per annum rate
expressed on an interest equivalent basis equal to the Standard & Poor's Kenny
30 day High Grade Index or any successor index (the "Kenny Index") (provided,
however, that any such successor index must be approved by Moody's (if Moody's
is then rating the shares of Municipal Preferred) and Standard & Poor's (if
Standard & Poor's is then rating the shares of Municipal Preferred)), made
available for the Business Day immediately preceding such date but in any event
not later than 8:30 A.M., New York City time, on such date by Standard & Poor's
J.J. Kenny Evaluation Services or any successor thereto, based upon 30-day yield
evaluations at par of short-term bonds, the interest on which is excludable for
regular federal income tax purposes under the Code, of "high grade" component
issuers selected by Standard & Poor's J.J. Kenny Evaluation Services or any such
successor from time to time in its discretion, which component issuers shall
include, without limitation, issuers of general obligation bonds but shall
exclude any bonds the interest on which constitutes an item of tax preference
under Section 57(a)(5) of the Code, or successor provisions, for purposes of the
"alternative minimum tax," divided by (B) 1.00 minus the maximum marginal
regular Federal individual income tax rate applicable to ordinary income or the
maximum marginal regular Federal corporate income tax rate applicable to
ordinary income (in each case expressed as a decimal), whichever is greater;
provided, however, that if the Kenny Index is not made so available by 8:30
A.M., New York City time, on such date by Standard & Poor's J.J. Kenny
Evaluation Services or any successor, the Taxable Equivalent of the Short-Term
Municipal Bond Rate shall mean the quotient of (A) the per annum rate expressed
on an interest equivalent basis equal to the most recent Kenny Index so made
available for any preceding Business Day, divided by (B) 1.00 minus the maximum
marginal regular Federal individual income tax rate applicable to ordinary
income or the maximum marginal regular Federal corporate income tax rate
applicable to ordinary income (in each case expressed as a decimal), whichever
is greater.
As used herein, " 'AA" Composite Commercial Paper Rate," on any date for any
Rate Period, means:
(i) (A) in the case of any Minimum Rate Period or any Special Rate
Period of fewer than 49 Rate Period Days, the interest equivalent of the
30-day rate; provided, however, that if such Rate Period is a Minimum Rate
Period and the "AA" Composite Commercial Paper Rate is being used to
determine the Applicable Rate when all of the outstanding shares of
Municipal Preferred are subject to Submitted Hold Orders, then the interest
equivalent of the seven-day rate, and (B) in the case of any Special Rate
Period of (1) 49 or more but fewer than 70 Rate Period Days, the interest
equivalent of the 60-day rate; (2) 70 or more but fewer than 85 Rate Period
Days, the arithmetic average of the interest equivalent of the 60-day and
90-day rates; (3) 85 or more but fewer than 99 Rate Period Days, the
interest equivalent of the 90-day rate; (4) 99 or more but fewer than 120
Rate Period Days, the arithmetic average of the interest equivalent of the
90-day and 120-day rates; (5) 120 or more but fewer than 141 Rate Period
Days, the interest equivalent of the 120-day rate; (6) 141 or more but fewer
than 162 Rate Period Days, the arithmetic average of the interest equivalent
of the 120-day and 180-day rates; and (7) 162 or more but fewer than 183
Rate Period Days, the interest equivalent of the 180-day rate, in each case
on commercial paper placed on behalf of issuers whose corporate bonds are
rated "AA" by Standard & Poor's or the equivalent of such rating by Standard
& Poor's or another rating agency, as made available on a discount basis or
otherwise by the Federal Reserve Bank of New York for the Business Day
immediately preceding such date; or
(ii) in the event that the Federal Reserve Bank of New York does not
make available any such rate, then the arithmetic average of such rates, as
quoted on a discount basis or otherwise, by the Commercial Paper Dealers to
the Auction Agent for the close of business on the Business Day next
preceding such date.
If any Commercial Paper Dealer does not quote a rate required to determine
the "AA" Composite Commercial Paper Rate, the "AA" Composite Commercial Paper
Rate shall be determined on the basis of the quotation or quotations furnished
by the remaining Commercial Paper Dealer or Commercial Paper Dealers and any
Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers
selected by the Trust to provide such rate or rates not being supplied by any
Commercial Paper Dealer or Commercial Paper Dealers, as the case may be, or, if
the Trust does not select any such Substitute Commercial Paper Dealer or
Substitute Commercial Paper Dealers, by the remaining Commercial Paper Dealer or
Commercial Paper Dealers. For purposes of this definition, the "interest
equivalent" of a rate stated on a discount basis (a "discount rate") for
commercial paper of a given days' maturity shall be equal to the quotient
(rounded upwards to the next higher one-thousandth (0.001) of 1%) of (A) the
discount rate divided by (B) the difference between (x) 1.00 and (y) a fraction
the numerator of which shall be the product of the discount rate times the
number of days in which such commercial paper matures and the denominator of
which shall be 360. As used herein, "Commercial Paper Dealers" means Lehman
Commercial Paper Incorporated, Goldman, Sachs & Co. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated and such other commercial paper dealer or dealers as
the Trust may from time to time appoint, or, in lieu of any thereof, their
respective affiliates or successors. As used herein, "Substitute Commercial
Paper Dealer" means CS First Boston Corporation or Morgan Stanley & Co.
Incorporated or their respective affiliates or successors, if such entity is a
commercial paper dealer, provided that none of such entities shall be a
Commercial Paper Dealer.
As used herein, "Treasury Bill Rate," on any date for any Rate Period,
means:
(i) the bond equivalent yield, calculated in accordance with prevailing
industry convention, of the rate on the most recently auctioned Treasury
Bill with a remaining maturity closest to the length of such Rate Period, as
quoted in The Wall Street Journal on such date for the Business Day next
preceding such date; or
(ii) in the event that any such rate is not published in The Wall Street
Journal, then the bond equivalent yield, calculated in accordance with
prevailing industry convention, as calculated by reference to the arithmetic
average of the bid price quotations of the most recently auctioned Treasury
Bill with a remaining maturity closest to the length of such Rate Period, as
determined by bid price quotations as of the close of business on the
Business Day immediately preceding such date obtained from the U.S.
Government Securities Dealers to the Auction Agent.
As used herein, "Treasury Note Rate," on any date for any Rate Period,
means:
(i) the yield on the most recently auctioned Treasury Note with a
remaining maturity closest to the length of such Rate Period, as quoted in
The Wall Street Journal on such date for the Business Day next preceding
such date; or
(ii) in the event that any such rate is not published in The Wall Street
Journal, then the yield as calculated by reference to the arithmetic average
of the bid price quotations of the most recently auctioned Treasury Note
with a remaining maturity closest to the length of such Rate Period, as
determined by bid price quotations as of the close of business on the
Business Day immediately preceding such date obtained from the U.S.
Government Securities Dealers to the Auction Agent.
For purposes of the foregoing, "Treasury Bill" means a direct obligation of
the U.S. Government having a maturity at the time of issuance of 364 days or
less, and "Treasury Note" means a direct obligation of the U.S. Government
having a maturity at the time of issuance of five years or less but more than
364 days. If any U.S. Government Securities Dealer does not quote a rate
required to determine the Treasury Bill Rate or the Treasury Note Rate, such
rate shall be determined on the basis of the quotation or quotations furnished
by the remaining U.S. Government Securities Dealer or U.S. Government Securities
Dealers and any Substitute U.S. Government Securities Dealers selected by the
Trust to provide such rate or rates not being supplied by any U.S. Government
Securities Dealer or U.S. Government Securities Dealers, as the case may be, or,
if the Trust does not select any such Substitute U.S. Government Securities
Dealer or Substitute U.S. Government Securities Dealers, by the remaining U.S.
Government Securities Dealer or U.S. Government Securities Dealers. As used
herein, "U.S. Government Securities Dealer" means Lehman Government Securities
Incorporated, Goldman, Sachs & Co., Salomon Smith Barney Inc. and Morgan
Guaranty Trust Company of New York or their respective affiliates or successors,
if such entity is a U.S. Government securities dealer. As used herein,
"Substitute U.S. Government Securities Dealer" shall mean CS First Boston
Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated or their
respective affiliates or successors, if such entity is a U.S. Government
securities dealer, provided that none of such entities shall be a U.S.
Government Securities Dealer.
The applicable "AA" Composite Commercial Paper Rates, Taxable Equivalent of
the Short-Term Municipal Bond Rates, Treasury Bill Rates and Treasury Note Rates
will be the rates announced on such Auction Date for the Business Day
immediately prior to such Auction Date.
The "Rate Multiple," when used with respect to shares of Municipal
Preferred, on an Auction Date, will be a percentage, determined as set forth
below (depending on whether the Trust has notified the Auction Agent of its
intent to allocate any net capital gain or other income taxable for Federal
income tax purposes to such shares prior to the Auction establishing the
Applicable Rate for such shares), based on the prevailing rating of shares of
Municipal Preferred in effect at the close of business on the Business Day next
preceding such Auction Date:
APPLICABLE APPLICABLE
PERCENTAGE- PERCENTAGE-
PREVAILING RATING NO NOTIFICATION NOTIFICATION
----------------- --------------- ------------
"aa3"/AA- or higher ....................... 110% 150%
"a3"/A- ................................... 125% 160%
"baa3"/BBB- ............................... 150% 250%
"ba3"/BB- ................................. 200% 275%
Below "ba3"/BB- ........................... 250% 300%
For purposes of this definition, the "prevailing rating" of shares of
Municipal Preferred shall be (i) "aa3"/AA- or higher if such shares have a
rating of "aa3" or better by Moody's and AA- or better by Standard & Poor's or
the equivalent of such ratings by such agencies or a substitute rating agency or
substitute rating agencies selected as provided below, (ii) if not "aa3"/ AA- or
higher, then "a3"/A- if such shares have a rating of "a3" or better by Moody's
and A- or better by Standard & Poor's or the equivalent of such ratings by such
agencies or a substitute rating agency or substitute rating agencies selected as
provided below, (iii) if not "aa3"/AA- or higher or "a3"/ A-, then "baa3"/BBB-
if such shares have a rating of "baa3" or better by Moody's and BBB- or better
by Standard & Poor's or the equivalent of such ratings by such agencies or a
substitute rating agency or substitute rating agencies selected as provided
below, (iv) if not "aa3"/AA- or higher, "a3"/A- or "baa3"/BBB-, then "ba3"/BB-
if such shares have a rating of "ba3" or better by Moody's and BB- or better by
Standard & Poor's or the equivalent of such ratings by such agencies or a
substitute rating agency or substitute rating agencies selected as provided
below, and (v) if not "aa3"/AA- or higher, "a3"/ A-, "baa3"/BBB-, or "ba3"/BB-,
then below "ba3"/BB-; provided, however, that if such shares are rated by only
one rating agency, the prevailing rating shall be determined without reference
to the rating of any other rating agency. The Trust will take all reasonable
action necessary to enable either Standard & Poor's or Moody's to provide a
rating for shares of Municipal Preferred. If neither Standard & Poor's nor
Moody's shall make such a rating available, Salomon Smith Barney Inc. or its
successor shall select at least one nationally recognized statistical rating
organization (as that term is used in the rules and regulations of the SEC under
the Securities Exchange Act of 1934, as amended) to act as a substitute rating
agency in respect of the shares of Municipal Preferred, and the Trust shall take
all reasonable action to enable such rating agency to provide a rating for such
shares.
SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT
Prior to 1:30 P.M., New York City time, on each Auction Date, or such other time
on the Auction Date specified by the Auction Agent (the "Submission Deadline"),
each Broker-Dealer will submit to the Auction Agent in writing or over the
internet all Orders obtained by it for the Auction to be conducted on such
Auction Date, designating itself (unless otherwise permitted by the Trust) as
the Existing Holder or Potential Holder, as the case may be, in respect of the
shares of Municipal Preferred subject to such Orders. Any Order submitted by a
Beneficial Owner or a Potential Beneficial Owner to its Broker-Dealer, or by a
Broker-Dealer to the Auction Agent, prior to the Submission Deadline on any
Auction Date, shall be irrevocable.
If any rate specified in any Bid contains more than three figures to the
right of the decimal point, the Auction Agent will round such rate to the next
highest one-thousandth (0.001) of 1%.
If one or more Orders of an Existing Holder is submitted to the Auction
Agent covering in the aggregate more than the number of outstanding shares of
Municipal Preferred subject to an Auction held by such Existing Holder, such
Orders will be considered valid in the following order of priority:
(a) all Hold Orders will be considered valid, but only up to and
including in the aggregate the number of shares of Municipal Preferred held
by such Existing Holder, and, if the number of shares subject to such Hold
Orders exceeds the number of shares held by such Existing Holder, the number
of shares subject to each such Hold Order shall be reduced pro rata to cover
the number of shares held by such Existing Holder;
(b) (i) any Bid will be considered valid up to and including the excess
of the number of shares of Municipal Preferred held by such Existing Holder
over the number of shares of Municipal Preferred subject to any Hold Orders
referred to in clause (a) above;
(ii) subject to subclause (i), if more than one Bid of an Existing
Holder is submitted to the Auction Agent with the same rate and the
number of shares of Municipal Preferred subject to such Bids is greater
than such excess, such Bids will be considered valid up to and including
the amount of such excess, and the number of shares of Municipal
Preferred subject to each Bid with the same rate will be reduced pro
rata to cover the number of shares of Municipal Preferred equal to such
excess;
(iii) subject to subclauses (i) and (ii), if more than one Bid of an
Existing Holder is submitted to the Auction Agent with different rates,
such Bids shall be considered valid in the ascending order of their
respective rates up to and including the amount of such excess; and
(iv) in any such event, the number, if any, of such shares subject
to any portion of Bids considered not valid in whole or in part under
this clause (b) will be treated as the subject of a Bid by or on behalf
of a Potential Holder at the rate specified therein; and
(c) all Sell Orders will be considered valid up to and including the
excess of the number of outstanding shares of Municipal Preferred held by
such Existing Holder over the sum of shares of Municipal Preferred subject
to valid Hold Orders referred to in clause (a) above and valid Bids referred
to in clause (b) above.
If more than one Bid of a Potential Holder for shares of Municipal Preferred
is submitted to the Auction Agent by or on behalf of any Potential Holder, each
Bid submitted will be a separate Bid with the rate and number of shares therein
specified.
DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND APPLICABLE RATE
Not earlier than the Submission Deadline on each Auction Date, the Auction Agent
will assemble all valid Orders submitted or deemed submitted to it by the
Broker-Dealers (each such Hold Order, Bid or Sell Order as submitted or deemed
submitted by a Broker-Dealer being herein referred to as a "Submitted Hold
Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or as
a "Submitted Order" and collectively as "Submitted Hold Orders," "Submitted
Bids" or "Submitted Sell Orders," as the case may be, or as "Submitted Orders")
and will determine the excess of the number of outstanding shares of Municipal
Preferred over the number of outstanding shares of Municipal Preferred subject
to Submitted Hold Orders (such excess being herein referred to as the "Available
Municipal Preferred") and whether Sufficient Clearing Bids have been made in the
Auction. "Sufficient Clearing Bids" will have been made if the number of
outstanding shares of Municipal Preferred that are the subject of Submitted Bids
of Potential Holders specifying rates not higher than the Maximum Rate equals or
exceeds the number of outstanding shares of Municipal Preferred that are the
subject of Submitted Sell Orders (including the number of shares subject to Bids
of Existing Holders specifying rates higher than the Maximum Rate).
If Sufficient Clearing Bids have been made, the Auction Agent will determine
the lowest rate specified in the Submitted Bids (the "Winning Bid Rate") which,
taking into account the rates in the Submitted Bids of Existing Holders, would
result in Existing Holders continuing to hold an aggregate number of outstanding
shares of Municipal Preferred which, when added to the number of outstanding
shares of Municipal Preferred to be purchased by Potential Holders, based on the
rates in their Submitted Bids, would equal not less than the Available Municipal
Preferred. In such event, the Winning Bid Rate will be the Applicable Rate for
the next Rate Period for all shares of Municipal Preferred.
If Sufficient Clearing Bids have not been made (other than because all of
the outstanding shares of Municipal Preferred are subject to Submitted Hold
Orders), the Applicable Rate for the next Rate Period for all shares of
Municipal Preferred will be equal to the Maximum Rate. If Sufficient Clearing
Bids have not been made, Beneficial Owners that have submitted or that are
deemed to have submitted Sell Orders may not be able to sell in the Auction all
shares of Municipal Preferred subject to such Sell Orders but will continue to
own shares of Municipal Preferred for the next Rate Period, dividends for which
may include income taxable to such Beneficial Owners. See "The Auction --
Auction Dates; Advance Notice of Allocation of Taxable Income" above and
"Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares" below.
If all of the outstanding shares of Municipal Preferred are subject to
Submitted Hold Orders, the Applicable Rate for the next Rate Period will be the
lesser of the Kenny Index (if such Rate Period consists of fewer than 183 Rate
Period Days) or the product of (i) (1) the "AA" Composite Commercial Paper Rate
on the Auction Date for such Rate Period, if such Rate Period consists of fewer
than 183 Rate Period Days; (2) the Treasury Bill Rate on such Auction Date for
such Rate Period, if such Rate Period consists of more than 182 but fewer than
365 Rate Period Days; or (3) the Treasury Note Rate on such Auction Date for
such Rate Period, if such Rate Period is more than 364 Rate Period Days (the
rate described in the foregoing clause (i)(1), (2) or (3) as applicable, being
referred to herein as the "Benchmark Rate") and (ii) 1 minus the maximum
marginal regular Federal individual income tax rate applicable to ordinary
income or the maximum marginal regular Federal corporate income tax rate
applicable to ordinary income, whichever is greater; provided, however, that if
the Trust has notified the Auction Agent of its intent to allocate to shares of
Municipal Preferred in such Rate Period any net capital gain or other income
taxable for federal income tax purposes ("Taxable Income"), the Applicable Rate
for shares of Municipal Preferred for such Rate Period will be (A) if the
Taxable Yield Rate (as defined below) is greater than the Benchmark Rate, then
the Benchmark Rate, or (B) if the Taxable Yield Rate is less than or equal to
the Benchmark Rate, then the rate equal to the sum of (x) the lesser of the
Kenny Index (if such Rate Period consists of fewer than 183 Rate Period Days) or
the product of the Benchmark Rate multiplied by the factor set forth in the
preceding clause (ii) and (y) the product of the maximum marginal regular
Federal individual income tax rate applicable to ordinary income or the maximum
marginal regular Federal corporate income tax applicable to ordinary income,
whichever is greater, multiplied by the Taxable Yield Rate. For purposes of the
foregoing, "Taxable Yield Rate" means the rate determined by (a) dividing the
amount of Taxable Income available for distribution per share of Municipal
Preferred by the number of days in the Dividend Period in respect of which such
Taxable Income is contemplated to be distributed, (b) multiplying the amount
determined in (a) above by 365 (in the case of a Dividend Period of 7 Rate
Period Days) or 360 (in the case of any other Dividend Period), and (c) dividing
the amount determined in (b) above by $25,000. In calculating the "AA" Composite
Commercial Paper Rate, the Treasury Bill Rate and the Treasury Note Rate for
such purpose, the rates used will be the rates or yields specified in the
applicable definitions of "AA" Composite Commercial Paper Rate, Treasury Bill
Rate and Treasury Note Rate set forth under "The Auction -- Orders by Existing
Holders and Potential Holders."
ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND
ALLOCATION OF SHARES
Based on the determinations made under "Determination of Sufficient Clearing
Bids, Winning Bid Rate and Applicable Rate" above and, subject to the discretion
of the Auction Agent to round and allocate certain shares as described below,
Submitted Bids and Submitted Sell Orders will be accepted or rejected in the
order of priority set forth in the Auction Procedures, with the result that
Existing Holders and Potential Holders of shares of Municipal Preferred will
sell, continue to hold and/or purchase such shares as set forth below. Existing
Holders that submitted or were deemed to have submitted Hold Orders (or on whose
behalf Hold Orders were submitted or deemed to have been submitted) will
continue to hold the shares of Municipal Preferred subject to such Hold Orders.
If Sufficient Clearing Bids have been made:
(a) Each Existing Holder that placed or on whose behalf was placed a
Submitted Sell Order or Submitted Bid specifying any rate higher than the
Winning Bid Rate will sell the outstanding shares of Municipal Preferred
subject to such Submitted Sell Order or Submitted Bid;
(b) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate lower than the Winning Bid Rate will
continue to hold the outstanding shares of Municipal Preferred subject to
such Submitted Bid;
(c) Each Potential Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate lower than the Winning Bid Rate will
purchase the number of outstanding shares of Municipal Preferred subject to
such Submitted Bid;
(d) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to the Winning Bid Rate will continue
to hold the shares of Municipal Preferred subject to such Submitted Bid,
unless the number of outstanding shares of Municipal Preferred subject to
all such Submitted Bids is greater than the number of shares of Municipal
Preferred in excess of the Available Municipal Preferred over the number of
shares of Municipal Preferred accounted for in clauses (b) and (c) above, in
which event each Existing Holder with such a Submitted Bid will continue to
hold a number of outstanding shares of Municipal Preferred subject to such
Submitted Bid determined on a pro rata basis based on the number of
outstanding shares of Municipal Preferred subject to all such Submitted Bids
of such Existing Holders; and
(e) Each Potential Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to the Winning Bid Rate will purchase
any shares of Available Municipal Preferred not accounted for in clauses (b)
through (d) above on a pro rata basis based on the outstanding shares of
Municipal Preferred subject to all such Submitted Bids.
If Sufficient Clearing Bids have not been made (unless this results because
all outstanding shares of Municipal Preferred are subject to Submitted Hold
Orders):
(a) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to or lower than the Maximum Rate will
continue to hold the outstanding shares of Municipal Preferred subject to
such Submitted Bid;
(b) Each Potential Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to or lower than the Maximum Rate will
purchase the number of outstanding shares of Municipal Preferred subject to
such Submitted Bid; and
(c) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate higher than the Maximum Rate or a Submitted
Sell Order will sell a number of shares of Municipal Preferred determined on
a pro rata basis based on the number of outstanding shares of Municipal
Preferred subject to all such Submitted Bids and Submitted Sell Orders.
If, as a result of the pro rata allocation described in clauses (d) or (e)
of the second preceding paragraph or clause (c) of the next preceding paragraph,
any Existing Holder would be entitled or required to sell, or any Potential
Holder would be entitled or required to purchase, a fraction of a share of
Municipal Preferred, the Auction Agent will, in such manner as, in its sole
discretion, it will determine, round up or down to the nearest whole share the
number of shares of Municipal Preferred being sold or purchased on such Auction
Date so that the number of shares sold or purchased by each Existing Holder or
Potential Holder will be whole shares of Municipal Preferred. If as a result of
the pro rata allocation described in clause (e) of the second preceding
paragraph, any Potential Holder would be entitled or required to purchase less
than a whole share of Municipal Preferred, the Auction Agent will, in such
manner as, in its sole discretion, it will determine, allocate shares of
Municipal Preferred for purchase among Potential Holders so that only whole
shares of Municipal Preferred are purchased by any such Potential Holder, even
if such allocation results in one or more of such Potential Holders not
purchasing shares of Municipal Preferred.
NOTIFICATION OF RESULTS; SETTLEMENT
The Auction Agent will be required to advise each Broker-Dealer that submitted
an Order of the Applicable Rate for the next Rate Period and, if the Order was a
Bid or Sell Order, whether such Bid or Sell Order was accepted or rejected, in
whole or in part, by telephone by approximately 3:00 P.M., New York City time,
on each Auction Date. Each Broker-Dealer that submitted an Order for the account
of a customer will then be required to advise such customer of the Applicable
Rate for the next Rate Period and, if such Order was a Bid or a Sell Order,
whether such Bid or Sell Order was accepted or rejected, in whole or in part,
will be required to confirm purchases and sales with each customer purchasing or
selling shares of Municipal Preferred as a result of the Auction and will be
required to advise each customer purchasing or selling shares of Municipal
Preferred as a result of the Auction to give instructions to its Agent Member of
the Securities Depository to pay the purchase price against delivery of such
shares or to deliver such shares against payment therefor, as appropriate. The
Auction Agent will be required to record each transfer of shares of Municipal
Preferred on the registry of Existing Holders to be maintained by the Auction
Agent. See "General" above.
In accordance with the Securities Depository's normal procedures, on the
Business Day after the Auction Date, the transactions described above will be
executed through the Securities Depository and the accounts of the respective
Agent Members at the Securities Depository will be debited and credited and
shares delivered as necessary to effect the purchases and sales of shares of
Municipal Preferred as determined in the Auction. Purchasers will make payment
through their Agent Members in same-day funds to the Securities Depository
against delivery through their Agent Members; the Securities Depository will
make payment in accordance with its normal procedures, which now provide for
payment against delivery by their Agent Members in same-day funds. The
settlement procedures to be used with respect to Auctions for shares of
Municipal Preferred are set forth in Appendix D hereto.
If any Existing Holder selling shares of Municipal Preferred in an Auction
fails to deliver such shares, the Broker-Dealer of any person that was to have
purchased shares of Municipal Preferred in such Auction may deliver to such
person a number of whole shares of Municipal Preferred that is less than the
number of shares that otherwise was to be purchased by such person. In such
event, the number of shares of Municipal Preferred to be so delivered shall be
determined by such Broker-Dealer. Delivery of such lesser number of shares shall
constitute good delivery.
CONCERNING THE AUCTION AGENT
The Auction Agent is acting as agent for the Trust in connection with Auctions.
In the absence of bad faith or negligence on its part, the Auction Agent will
not be liable for any action taken, suffered, or omitted or for any error of
judgment made by it in the performance of its duties under the Auction Agency
Agreement and will not be liable for any error of judgment made in good faith
unless the Auction Agent will have been negligent in ascertaining the pertinent
facts.
The Auction Agent may rely upon, as evidence of the identities of the
Existing Holders of shares of Municipal Preferred, a list of initial owners of
such shares provided by the Trust, the results of Auctions, notices from any
Broker-Dealer (or other Person, if permitted by the Trust) with respect to
transfers described in the Prospectus under "The Auction -- Secondary Market
Trading and Transfer of Municipal Preferred" and notices from the Trust. The
Auction Agent is not required to accept any such notice for an Auction unless it
is received by the Auction Agent by 3:00 P.M., New York City time, on the
Business Day preceding such Auction.
The Auction Agent will be the transfer agent, registrar, dividend disbursing
agent and redemption agent for shares of Municipal Preferred. The registrar for
shares of Municipal Preferred will send notices to holders of shares of
Municipal Preferred of any special meetings at which holders of Municipal
Preferred have the right to elect trustees of the Trust. See "Description of
Municipal Preferred -- Voting Rights" below.
The Auction Agent may terminate the Auction Agency Agreement upon notice to
the Trust on a date no earlier than 60 days after such notice. If the Auction
Agent should resign, the Trust will use its best efforts to enter into an
agreement with a successor Auction Agent containing substantially the same terms
and conditions as the Auction Agency Agreement. The Trust may remove the Auction
Agent provided that prior to such removal the Trust shall have entered into such
an agreement with a successor Auction Agent.
BROKER-DEALERS
The Auction Agent after each Auction for shares of Municipal Preferred will pay
to each Broker-Dealer, from funds provided by the Trust, a service charge at the
annual rate of 1/4 of 1% in the case of any Auction immediately preceding a Rate
Period of less than one year, or a percentage agreed to by the Trust and the
Broker-Dealers in the case of any Auction immediately preceding a Rate Period of
one year or longer, of the purchase price of shares of Municipal Preferred
placed by such Broker-Dealer at such Auction. For the purposes of the preceding
sentence, shares of Municipal Preferred will be placed by a Broker-Dealer if
such shares were (i) the subject of Hold Orders deemed to have been submitted to
the Auction Agent by the Broker-Dealer and were acquired by such Broker-Dealer
for its own account or were acquired by such Broker-Dealer for its customers who
are Beneficial Owners or (ii) the subject of an Order submitted by such
Broker-Dealer that is (A) a Submitted Bid of an Existing Holder that resulted in
such Existing Holder continuing to hold such shares as a result of the Auction
or (B) a Submitted Bid of a Potential Holder that resulted in such Potential
Holder purchasing such shares as a result of the Auction or (C) a valid Hold
Order.
The Trust may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
The Broker-Dealer Agreements provide that a Broker-Dealer (other than an
affiliate of the Trust) may submit Orders in Auctions for its own account,
unless the Trust notifies all Broker-Dealers that they may no longer do so, in
which case Broker-Dealers may continue to submit Hold Orders and Sell Orders for
their own accounts. Any Broker-Dealer that is an affiliate of the Trust may
submit Orders in Auctions, but only if such Orders are not for its own account.
If a Broker-Dealer submits an Order for its own account in any Auction, it might
have an advantage over other Bidders because it would have knowledge of all
Orders submitted by it in that Auction; such Broker-Dealer, however, would not
have knowledge of Orders submitted by other Broker-Dealers in that Auction.
The Broker-Dealers expect, but are not obligated, to maintain a secondary
trading market in shares of Municipal Preferred outside of Auctions. There can
be no assurance that a secondary trading market in shares of Municipal Preferred
will develop or, if it does develop, that it will provide owners with liquidity
of investment. The shares of Municipal Preferred will not be registered on any
stock exchange or on the National Association of Securities Dealers Automated
Quotations system.
DESCRIPTION OF MUNICIPAL PREFERRED
The descriptions of the shares of Municipal Preferred contained in the
Prospectus and this Statement of Additional Information do not purport to be
complete and are subject to and qualified in their entireties by reference to
the Declaration and the Statement. Copies of the Declaration and the form of
the Statement are filed as exhibits to the Registration Statement of which the
Prospectus and this Statement of Additional Information are a part and may be
inspected, and copies thereof may be obtained, as described under "Further
Information" in the Prospectus.
GENERAL
The shares of Municipal Preferred will rank on a parity with each other, with
shares of any other series of Municipal Preferred and with shares of any other
series of Preferred Shares as to the payment of dividends and the distribution
of assets upon dissolution, liquidation or winding up of the affairs of the
Trust.
DIVIDENDS
GENERAL. The holders of shares of Municipal Preferred offered pursuant to the
Prospectus will be entitled to receive, when, as and if declared by the Board of
Trustees, out of funds legally available therefor in accordance with the
Declaration, the Statement and applicable law, cumulative cash dividends at the
Applicable Rate thereof, determined as set forth below under "Determination of
Dividend Rate," and no more (except as otherwise provided below under "Gross-up
Payments"), payable on the respective dates determined as set forth below.
Holders of shares of Municipal Preferred shall not be entitled to any dividend,
whether payable in cash, property or shares, in excess of full cumulative
dividends on shares of Municipal Preferred. No interest, or sum of money in lieu
of interest, will be payable in respect of any dividend payment or payments on
shares of Municipal Preferred which may be in arrears, and, except as otherwise
provided herein, no additional sum of money will be payable in respect of any
such arrearage.
Dividends on shares of Municipal Preferred shall accumulate at the
Applicable Rate from the Date of Original Issue and, except as provided below,
shall be payable on Wednesday, December 13, 2000 and each Wednesday thereafter
with respect to shares of Series T Municipal Preferred and Friday, December 15,
2000 and each Friday thereafter with respect to shares of Series TH Municipal
Preferred; provided, however, that (1) if the Wednesday or Friday, as the case
may be, on which dividends would otherwise be payable on shares of such series
is not a Business Day, then such dividends shall be payable on shares of such
series on the first Business Day that falls after such Wednesday or Friday, as
the case may be; and (2) the Trust in its discretion may establish Dividend
Payment Dates in respect of any Special Rate Period of such shares consisting of
more than 28 Rate Period Days that differ from those set forth above; provided,
however, that such dates shall be set forth in the Notice of Special Rate Period
relating to such Special Rate Period, as delivered to the Auction Agent and
filed with the Secretary of the Trust; and further provided that (1) any such
Dividend Payment Date shall be a Business Day and (2) the last Dividend Payment
Date in respect of such Special Rate Period shall be the Business Day
immediately following the last day thereof, as such last day is determined as
set forth below under "Designation of Special Rate Periods."
The amount of dividends per share payable on shares of Municipal Preferred
on any date on which dividends shall be payable on such shares shall be computed
by multiplying the Applicable Rate in effect for such Dividend Period or
Dividend Periods or part thereof for which dividends have not been paid by a
fraction, the numerator of which shall be the number of days in such Dividend
Period or Dividend Periods or part thereof and the denominator of which shall be
365 if such Dividend Period consists of 7 Rate Period Days and 360 for all other
Dividend Periods, and applying the rate obtained against $25,000. Any dividend
payment made on shares of Municipal Preferred shall first be credited against
the earliest accumulated but unpaid dividends due with respect to such shares.
Each dividend on shares of Municipal Preferred will be paid on the Dividend
Payment Date therefor to the holders of record as their names appear on the
record books of the Trust on the Business Day next preceding such Dividend
Payment Date. Dividends in arrears for any past Dividend Period may be declared
and paid at any time, without reference to any regular Dividend Payment Date, to
the holders of record as their names appear on the record books of the Trust on
such date, not exceeding 15 days preceding the payment date thereof, as may be
fixed by the Board of Trustees.
The Securities Depository, in accordance with its current procedures, is
expected to credit on each Dividend Payment Date dividends received from the
Trust to the accounts of the respective Agent Members in next-day funds. Each of
the initial Broker-Dealers, however, has represented to the Trust that such
Broker-Dealer (or if such Broker-Dealer does not act as Agent Member, the Agent
Member designated by such Broker-Dealer) will make such dividend payments
available in same-day funds on each Dividend Payment Date to Beneficial Owners
that use such Broker-Dealer or its designee as Agent Member. A Beneficial Owner
of shares of Municipal Preferred that does not use one of the initial
Broker-Dealers or a designee thereof as its Agent Member should contact the
Agent Member used by such Beneficial Owner to determine whether such Agent
Member will make dividend payments available to such Beneficial Owner in
next-day or same-day funds. If any Agent Member does not make such dividends
available in same-day funds to a Beneficial Owner, such Beneficial Owner who
uses such Agent Member would not have same-day funds available to it until the
next Business Day, which, in the case of a Dividend Payment Date that is a
Wednesday, would be the following Thursday if it is a Business Day, and which,
in the case of a Dividend Payment Date that is a Friday, would be the following
Monday if it is a Business Day.
DETERMINATION OF DIVIDEND RATE. The dividend rates on shares of Municipal
Preferred offered pursuant to the Prospectus during the period from and after
the Date of Original Issue thereof to and including the last day of the Initial
Rate Period therefor will be equal to the rate per annum set forth with respect
to such shares on the cover page of the Prospectus. For each Subsequent Rate
Period thereafter, the dividend rate on such shares will be equal to the rate
per annum that results from an Auction on the Auction Date next preceding such
Subsequent Rate Period; provided, however, if:
(i) an Auction for any Subsequent Rate Period is not held for any reason
other than as described below, the dividend rate on such shares for such
Subsequent Rate Period will be the Maximum Rate on the Auction Date
therefor;
(ii) any Failure to Deposit shall have occurred with respect to shares
of Municipal Preferred during any Rate Period thereof (other than any
Special Rate Period of more than 364 Rate Period Days or any Rate Period
succeeding any Special Rate Period of more than 364 Rate Period Days during
which a Failure to Deposit occurred that has not been cured), but, prior to
12:00 Noon, New York City time, on the third Business Day next succeeding
the date on which such Failure to Deposit occurred, such Failure to Deposit
shall have been cured in accordance with the next succeeding paragraph, no
Auction will be held in respect of shares of Municipal Preferred for the
Subsequent Rate Period thereof and the dividend rate for such Subsequent
Rate Period will be the Maximum Rate on the Auction Date for such Subsequent
Rate Period;
(iii) any Failure to Deposit shall have occurred with respect to shares
of Municipal Preferred during any Rate Period thereof (other than any
Special Rate Period of more than 364 Rate Period Days or any Rate Period
succeeding any Special Rate Period of more than 364 Rate Period Days during
which a Failure to Deposit occurred that has not been cured), and, prior to
12:00 Noon, New York City time, on the third Business Day next succeeding
the date on which such Failure to Deposit occurred, such Failure to Deposit
shall not have been cured in accordance with the next succeeding paragraph,
no Auction will be held in respect of Municipal Preferred for the first
Subsequent Rate Period thereof thereafter (or for any Rate Period thereafter
to and including the Rate Period during which such Failure to Deposit is
cured in accordance with the next succeeding paragraph, no later than 12:00
Noon, New York City time, on the fourth Business Day prior to the end of
such Rate Period), and the dividend rate for shares of Municipal Preferred
for each such Subsequent Rate Period will be a rate per annum equal to the
Maximum Rate on the Auction Date for such Subsequent Rate Period (but with
the prevailing rating for such shares, for purposes of determining such
Maximum Rate, being deemed to be "Below 'ba3"/BB-"); or
(iv) any Failure to Deposit shall have occurred with respect to shares
of Municipal Preferred during a Special Rate Period thereof of more than 364
Rate Period Days, or during any Rate Period thereof succeeding any Special
Rate Period of more than 364 Rate Period Days during which a Failure to
Deposit occurred that has not been cured, and, prior to 12:00 Noon, New York
City time, on the fourth Business Day preceding the Auction Date for the
Rate Period subsequent to such Rate Period, such Failure to Deposit shall
not have been cured in accordance with the next succeeding paragraph, no
Auction will be held in respect of shares of Municipal Preferred for such
Subsequent Rate Period (or for any Rate Period thereafter to and including
the Rate Period during which such Failure to Deposit is cured in accordance
with the next succeeding paragraph, no later than 12:00 Noon, New York City
time, on the fourth Business Day prior to the end of such Rate Period), and
the dividend rate for shares of Municipal Preferred for each such Subsequent
Rate Period shall be a rate per annum equal to the Maximum Rate on the
Auction Date for such Subsequent Rate Period (but with the prevailing rating
for such shares, for purposes of determining such Maximum Rate, being deemed
to be "Below 'ba3"/BB-") (the rate per annum at which dividends are payable
on shares of Municipal Preferred for any Rate Period being herein referred
to as the "Applicable Rate" for such shares).
A Failure to Deposit with respect to shares of Municipal Preferred shall
have been cured (if such Failure to Deposit is not solely due to the willful
failure of the Trust to make the required payments to the Auction Agent) with
respect to any Rate Period if, within the respective time periods described
immediately above, the Trust shall have paid to the Auction Agent (i) all
accumulated and unpaid dividends on the shares of Municipal Preferred and (ii)
without duplication, the Redemption Price for the shares of Municipal Preferred,
if any, for which a Notice of Redemption has been mailed; provided, however,
that the foregoing clause (ii) shall not apply to the Trust's failure to pay the
Redemption Price in respect of shares of Municipal Preferred when the related
Notice of Redemption provides that redemption of such shares is subject to one
or more conditions precedent and any such condition precedent shall not have
been satisfied at the time or times and in the manner specified in such Notice
of Redemption.
The Trust shall pay to the Auction Agent, not later than 12:00 noon, New
York City time, on each Dividend Payment Date for shares of Municipal Preferred,
an aggregate amount of federal funds or similar same-day funds in The City of
New York, New York, equal to the dividends to be paid to all Holders of such
shares on such Dividend Payment Date. All moneys paid to the Auction Agent for
the payment of dividends shall be held in trust for the payment of such
dividends by the Auction Agent for the benefit of the Holders specified above.
Any moneys paid to the Auction Agent in accordance with the foregoing but not
applied by the Auction Agent to the payment of dividends will, to the extent
permitted by law, be repaid to the Trust at the end of 90 days from the date on
which such moneys were so to have been applied.
GROSS-UP PAYMENTS. Holders of shares of Municipal Preferred shall be entitled to
receive, when, as and if declared by the Board of Trustees, out of funds legally
available therefor in accordance with the Declaration, the Statement and
applicable law, dividends in an amount equal to the aggregate Gross-up Payment
in accordance with the following:
If, in the case of any Minimum Rate Period or any Special Rate Period of 28
Rate Period Days or fewer, or in the case of any Special Rate Period, the Trust
allocates any net capital gain or other income taxable for federal income tax
purposes to a dividend paid on shares of Municipal Preferred without having
given advance notice thereof to the Auction Agent as described above under "The
Auction -- Auction Dates; Advance Notice of Allocation of Taxable Income" (such
allocation is referred to herein as a "Taxable Allocation") solely by reason of
the fact that such allocation is made retroactively as a result of the
redemption of all or a portion of the outstanding shares of Municipal Preferred
or the liquidation of the Trust, the Trust shall, prior to the end of the fiscal
year in which such dividend was paid or within 90 days (and generally within 60
days) after the end of the Trust's fiscal year for which a retroactive Taxable
Allocation is made, provide notice thereof to the Auction Agent and direct the
Trust's dividend disbursing agent to send such notice with a Gross-up Payment to
each holder of shares (initially Cede & Co., as nominee of the Securities
Depository) that was entitled to such dividend payment with respect to shares of
Municipal Preferred during such fiscal year at such holder's address as the same
appears or last appeared on the record books of the Trust. The Trust, within 30
days after such notice is given to the Auction Agent, will pay to the Auction
Agent (who then will distribute to such holders of Municipal Preferred), out of
funds legally available therefor, an amount equal to the aggregate Gross-up
Payment with respect to all retroactive Taxable Allocations made to such holder
during the fiscal year in question.
If the Trust does not give advance notice of the amount of taxable income to
be included in a dividend on shares of Municipal Preferred in the related
Auction, the Trust may include such taxable income in a dividend on shares of
Municipal Preferred if it increases the dividend by an additional amount
calculated as if such income were a retroactive Taxable Allocation and the
additional amount was a Gross-up Payment.
The Trust shall not be required to make Gross-up Payments with respect to
any net capital gain or other taxable income determined by the Internal Revenue
Service to be allocable in a manner different from that allocated by the Trust.
A "Gross-up Payment" in respect of any dividend means payment to a holder of
shares of Municipal Preferred of an amount which, giving effect to the Taxable
Allocations made with respect to such dividend, would cause such holder's
after-tax returns (taking into account both the Taxable Allocations and the
Gross-up Payment) to be equal to the after-tax return the holder would have
received if no such Taxable Allocations had occurred. Such Gross-up Payment
shall be calculated: (i) without consideration being given to the time value of
money; (ii) assuming that no holder of shares of Municipal Preferred is subject
to the Federal alternative minimum tax with respect to dividends received from
the Trust; and (iii) assuming that each holder of shares of Municipal Preferred
is taxable at the maximum marginal regular Federal individual income tax rate
applicable to ordinary income or net capital gain, as applicable, or the maximum
marginal regular Federal corporate income tax rate applicable to ordinary income
or net capital gain, as applicable, whichever is greater, in effect at the time
such Gross-up Payment is made.
RESTRICTIONS ON DIVIDENDS AND OTHER PAYMENTS. Under the 1940 Act, the Board of
Trustees may not declare any dividend (except a dividend payable in Common
Shares), or declare any other distribution, upon Common Shares, or purchase
Common Shares, unless in every such case the Preferred Shares, including the
shares of Municipal Preferred, have, at the time of any such declaration or
purchase (and after giving effect thereto), an asset coverage (as defined in and
determined pursuant to the 1940 Act) of at least 200% (or such other percentage
as may in the future be required by law).
In addition, for so long as any shares of Municipal Preferred are
outstanding, except as set forth in the following paragraph or otherwise
described herein, (A) the Trust may not declare, pay or set apart for payment
any dividend or other distribution (other than a dividend or distribution paid
in shares of, or in options, warrants or rights to subscribe for or purchase,
Common Shares or other shares, if any, ranking junior to the shares of Municipal
Preferred as to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Trust) in respect
of Common Shares or any other shares of the Trust ranking junior to or on a
parity with the shares of Municipal Preferred as to the payment of dividends or
the distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust, or call for redemption, redeem, purchase or otherwise
acquire for consideration any Common Shares or any other such junior shares
(except by conversion into or exchange for shares of the Trust ranking junior to
the shares of Municipal Preferred as to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust), or any such parity shares (except by conversion into or
exchange for shares of the Trust ranking junior to or on a parity with the
shares of Municipal Preferred as to payment of dividends and the distribution of
assets upon dissolution, liquidation or winding up of the affairs of the Trust),
unless (1) full cumulative dividends on shares of Municipal Preferred through
their most recently ended Dividend Period shall have been paid or shall have
been declared and sufficient funds for the payment thereof deposited with the
Auction Agent and (2) the Trust has redeemed the full number of shares of
Municipal Preferred required to be redeemed by any provision for mandatory
redemption pertaining thereto and (B) if either Moody's or Standard & Poor's is
rating the shares of Municipal Preferred, the Trust may not declare, pay or set
apart for payment any dividend or other distribution (other than a dividend or
distribution paid in shares of, or in options, warrants or rights to subscribe
for or purchase, Common Shares or other shares, if any, ranking junior to shares
of Municipal Preferred as to the payment of dividends and the distribution of
assets upon dissolution, liquidation or winding up of the affairs of the Trust)
in respect of Common Shares or any other shares of the Trust ranking junior to
shares of Municipal Preferred as to the payment of dividends or the distribution
of assets upon dissolution, liquidation or winding up of the affairs of the
Trust, or call for redemption, redeem, purchase or otherwise acquire for
consideration any Common Shares or any other such junior shares (except by
conversion into or exchange for shares of the Trust ranking junior to the shares
of Municipal Preferred as to the payment of dividends or the distribution of
assets upon dissolution, liquidation or winding up of the affairs of the Trust),
unless immediately after such transaction the Discounted Value of Moody's
Eligible Assets or Standard & Poor's Eligible Assets, or both, as the case may
be, would at least equal the Municipal Preferred Basic Maintenance Amount (see
"Description of Municipal Preferred -- Rating Agency Guidelines" and "--
Redemption").
Except as set forth in the next sentence, no dividends shall be declared or
paid or set apart for payment on any class or series of shares of beneficial
interest of the Trust ranking, as to the payment of dividends, on a parity with
shares of Municipal Preferred for any period unless full cumulative dividends
have been or contemporaneously are declared and paid on the shares of Municipal
Preferred through their most recent Dividend Payment Date. When dividends are
not paid in full upon the shares of Municipal Preferred through their most
recent Dividend Payment Date or upon any other class or series of shares ranking
on a parity as to the payment of dividends with shares of Municipal Preferred
through their most recent respective dividend payment dates, all dividends
declared upon shares of Municipal Preferred and any other such class or series
of shares ranking on a parity as to the payment of dividends with shares of
Municipal Preferred shall be declared pro rata so that the amount of dividends
declared per share on shares of Municipal Preferred and such other class or
series of shares shall in all cases bear to each other the same ratio that
accumulated dividends per share on the shares of Municipal Preferred and such
other class or series of shares bear to each other (for purposes of this
sentence, the amount of dividends declared per share of Municipal Preferred
shall be based on the Applicable Rate for such share for the Dividend Periods
during which dividends were not paid in full).
Under the Code, the Trust must, among other things, distribute at least 90%
of the sum of its net investment income (including the excess, if any, of net
short-term capital gain over net long-term capital loss) and its net tax-exempt
income each year in order to maintain its qualification for tax treatment as a
regulated investment company. The foregoing limitations on dividends,
distributions and purchases may under certain circumstances impair the Trust's
ability to maintain such qualification. See "Tax Matters -- Federal Income Tax
Matters."
DESIGNATION OF SPECIAL RATE PERIODS. The Trust, at its option, may designate any
succeeding Subsequent Rate Period of shares of Municipal Preferred as a Special
Rate Period consisting of a specified number of Rate Period Days evenly
divisible by seven and not more than 1,820 (approximately 5 years), subject to
adjustment as described below. A designation of a Special Rate Period shall be
effective only if (i) notice thereof shall have been given as provided herein,
(ii) an Auction for such shares shall have been held on the Auction Date
immediately preceding the first day of such proposed Special Rate Period and
Sufficient Clearing Bids for such shares shall have existed in such Auction and
(iii) if the Trust shall have mailed a Notice of Redemption with respect to any
shares of Municipal Preferred, as described under "Redemption -- Notice of
Redemption" below, the Redemption Price with respect to such shares shall have
been deposited with the Auction Agent. In the event the Trust wishes to
designate any succeeding Subsequent Rate Period for shares of Municipal
Preferred as a Special Rate Period consisting of more than 28 Rate Period Days,
the Trust shall notify Standard & Poor's (if Standard & Poor's is then rating
such shares) and Moody's (if Moody's is then rating such shares) in advance of
the commencement of such Subsequent Rate Period that the Trust wishes to
designate such Subsequent Rate Period as a Special Rate Period and shall provide
Standard & Poor's (if Standard & Poor's is then rating such shares) and Moody's
(if Moody's is then rating such shares) with such documents as either may
request.
In the event the Trust wishes to designate a Subsequent Rate Period as a
Special Rate Period, but the day following what would otherwise be the last day
of such Special Rate Period is not (a) a Wednesday that is a Business Day in the
case of a series of Municipal Preferred designated as "Series T Municipal
Preferred," or (b) a Friday that is a Business Day in the case of a series of
Municipal Preferred designated as "Series TH Municipal Preferred," then the
Trust shall designate such Subsequent Rate Period as a Special Rate Period
consisting of the period commencing on the first day following the end of the
immediately preceding Rate Period and ending (a) on the first Tuesday that is
followed by a Wednesday that is a Business Day proceeding what would otherwise
be such last day, in the case of Series T Municipal Preferred, or (b) on the
first Thursday that is followed by a Friday that is a Business Day proceeding
what would otherwise be such last day in the case of Series TH Municipal
Preferred.
If the Trust proposes to designate any succeeding Subsequent Rate Period of
shares of Municipal Preferred as a Special Rate Period, not less than 20 (or
such lesser number of days as may be agreed to from time to time by the Auction
Agent) nor more than 30 days prior to the date the Trust proposes to designate
as the first day of such Special Rate Period (which shall be such day that would
otherwise be the first day of a Minimum Rate Period), notice shall be (i)
published or caused to be published by the Trust in a newspaper of general
circulation to the financial community in The City of New York, New York, which
carries financial news, and (ii) mailed by the Trust by first-class mail,
postage prepaid, to the holders of shares of Municipal Preferred. Each such
notice shall state (A) that the Trust may exercise its option to designate a
succeeding Subsequent Rate Period of shares of Municipal Preferred as a Special
Rate Period, specifying the first day thereof and (B) that the Trust will, by
11:00 A.M., New York City time, on the second Business Day next preceding such
date (or by such later time or date, or both, as may be agreed to by the Auction
Agent), notify the Auction Agent of either (x) its determination, subject to
certain conditions, to exercise such option, in which case the Trust shall
specify the Special Rate Period designated, or (y) its determination not to
exercise such option.
No later than 11:00 A.M., New York City time, on the second Business Day
next preceding the first day of any proposed Special Rate Period as to which
notice has been given as set forth in the preceding paragraph (or such later
time or date, or both, as may be agreed to by the Auction Agent), the Trust
shall deliver to the Auction Agent either:
(i) a notice ("Notice of Special Rate Period") stating (A) that the
Trust has determined to designate the next succeeding Rate Period of shares
of Municipal Preferred as a Special Rate Period, specifying the same and the
first day thereof, (B) the Auction Date immediately prior to the first day
of such Special Rate Period, (C) that such Special Rate Period shall not
commence if (1) an Auction for such shares shall not be held on such Auction
Date for any reason or (2) an Auction for such shares shall be held on such
Auction Date but Sufficient Clearing Bids for such shares shall not exist in
such Action, (D) the scheduled Dividend Payment Dates for such shares during
such Special Rate Period and (E) the Special Redemption Provisions, if any,
applicable to such shares in respect of such Special Rate Period; such
notice to be accompanied by a Municipal Preferred Basic Maintenance Report
showing that, as of the third Business Day next preceding such proposed
Special Rate Period, Moody's Eligible Assets (if Moody's is then rating such
shares) and Standard & Poor's Eligible Assets (if Standard & Poor's is then
rating such shares) each have an aggregate Discounted Value at least equal
to the Municipal Preferred Basic Maintenance Amount as of such Business Day
(assuming for purposes of the foregoing calculation that (a) the Maximum
Rate is the Maximum Rate on such Business Day as if such Business Day were
the Auction Date for the proposed Special Rate Period, and (b) the Moody's
Discount Factors applicable to Moody's Eligible Assets will be determined by
reference to the first Moody's Exposure Period longer than the Moody's
Exposure Period then applicable to the Trust); or
(ii) a notice stating that the Trust has determined not to exercise its
option to designate a Special Rate Period of shares of Municipal Preferred
and that the next succeeding Rate Period shall be a Minimum Rate Period.
If the Trust fails to deliver either such notice (and, in the case of the
notice described in clause (i) above, a Municipal Preferred Basic Maintenance
Report to the effect set forth in clause (i) (if either Moody's or Standard &
Poor's is then rating the shares of Municipal Preferred)) with respect to any
designation of any proposed Special Rate Period to the Auction Agent by 11:00
A.M., New York City time, on the second Business Day next preceding the first
day of such proposed Special Rate Period (or by such later time or date, or
both, as may be agreed to by the Auction Agent), the Trust shall be deemed to
have delivered a notice to the Auction Agent with respect to such Special Rate
Period to the effect set forth in clause (ii) above. In the event the Trust
delivers to the Auction Agent a notice described in clause (i) above, it shall
file a copy of such notice with the Secretary of the Trust, and the contents of
such notice shall be binding on the Trust. In the event the Trust delivers to
the Auction Agent a notice described in clause (ii) above, the Trust will
provide Moody's (if Moody's is then rating the shares of Municipal Preferred)
and Standard & Poor's (if Standard & Poor's is then rating the shares of
Municipal Preferred) a copy of such notice.
VOTING RIGHTS
Holders of shares of Municipal Preferred are entitled to vote on certain matters
as described herein under "Investment Objective and Policies -- Fundamental
Investment Policies" and in the Prospectus under "Description of Municipal
Preferred -- Voting Rights" and "Certain Provisions in the Declaration of
Trust."
In connection with the election of the Trust's trustees, holders of
outstanding Preferred Shares, including shares of Municipal Preferred, voting
together as one separate class, shall be entitled to elect two of the Trust's
trustees, and the remaining trustees will be elected by holders of Common Shares
and Preferred Shares, including shares of Municipal Preferred, voting together
as a single class. In addition, if at any time dividends (whether or not earned
or declared) on outstanding Preferred Shares, including shares of Municipal
Preferred, shall be due and unpaid in an amount equal to two full years'
dividends thereon, and sufficient cash or specified securities shall not have
been deposited with the Auction Agent for the payment of such dividends, then,
as the sole remedy of holders of outstanding Preferred Shares, including shares
of Municipal Preferred, the number of trustees constituting the Board of
Trustees shall be automatically increased by the smallest number that, when
added to the two trustees elected exclusively by the holders of Preferred
Shares, including shares of Municipal Preferred, as described above, would
constitute a majority of the Board of Trustees as so increased by such smallest
number; and at a special meeting of shareholders which will be called and held
as soon as practicable, and at all subsequent meetings at which trustees are to
be elected, the holders of Preferred Shares, including shares of Municipal
Preferred, voting as a separate class, will be entitled to elect the smallest
number of additional trustees that, together with the two trustees which such
holders will be in any event entitled to elect, constitutes a majority of the
total number of trustees of the Trust as so increased. The terms of office of
the persons who are trustees at the time of that election will continue. If the
Trust thereafter shall pay, or declare and set apart for payment, in full all
dividends payable on all outstanding Preferred Shares, including shares of
Municipal Preferred, the voting rights stated in the preceding sentence shall
cease, and the terms of office of all of the additional trustees elected by the
holders of Preferred Shares, including shares of Municipal Preferred (but not of
the trustees with respect to whose election the holders of Common Shares were
entitled to vote or the two trustees the holders of Preferred Shares have the
right to elect in any event), will terminate automatically.
So long as any shares of Municipal Preferred are outstanding, the Trust may
not, without the affirmative vote of the holders of at least a majority of the
shares of Municipal Preferred outstanding at the time, voting together as one
separate class:
(a) authorize, create or issue additional shares of Municipal Preferred
or classes or series of Preferred Shares ranking prior to or on a parity
with shares of Municipal Preferred with respect to the payment of dividends
or the distribution of assets upon dissolution, liquidation or winding up of
the affairs of the Trust (except that the Trust may, without the vote of the
holders of shares of Municipal Preferred, authorize, create or issue
additional shares of Municipal Preferred or classes or series of Preferred
Shares ranking on a parity with shares of Municipal Preferred with respect
to the payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Trust if the Trust obtains
confirmation from Moody's (if Moody's is then rating the shares of Municipal
Preferred) and Standard & Poor's (if Standard & Poor's is then rating the
shares of Municipal Preferred) that the issuance of any such additional
shares or class or series of shares would not impair the rating then
assigned by such rating agency to shares of Municipal Preferred; provided,
however, that if Moody's or Standard & Poor's is not then rating the shares
of Municipal Preferred the aggregate liquidation preference of all Preferred
Shares of the Trust outstanding after any such issuance, exclusive of
accumulated and unpaid dividends, may not exceed $140,000,000); or
(b) amend, alter or repeal the provisions of the Declaration, the
By-Laws or the Statement, whether by merger, consolidation or otherwise, so
as to materially affect any preference, right or power of the shares of
Municipal Preferred or the holders thereof (provided, however, that a
division of a share of Municipal Preferred shall be deemed to affect any
such preference, right or power only if the terms of such division adversely
affect the holders of any shares of Municipal Preferred);
provided, however, that (i) none of the actions permitted by the exception
to (a) above will be deemed to affect such preferences, rights or powers and
(ii) the authorization, creation and issuance of classes or series of shares
ranking junior to the Municipal Preferred with respect to the payment of
dividends and the distribution of assets upon dissolution, liquidation or
winding up of the affairs of the Trust will be deemed to affect such
preferences, rights or powers only if at least one of Moody's or Standard &
Poor's is then rating the shares of Municipal Preferred and such issuance
would, at the time thereof, cause the Trust not to satisfy the 1940 Act
Municipal Preferred Asset Coverage or the Municipal Preferred Basic
Maintenance Amount. So long as any shares of Municipal Preferred are
outstanding, the Trust may not, without the affirmative vote of the holders
of at least 66 2/3% of the shares of Municipal Preferred outstanding at the
time, voting as a separate class, file a voluntary application for relief
under Federal bankruptcy law or any similar application under state law for
so long as the Trust is solvent and does not foresee becoming insolvent. If
any action set forth in this paragraph would adversely affect the rights of
one or more series (the "Affected Series") of Municipal Preferred in a
manner different from any other series of Municipal Preferred, the Trust
will not approve any such action without the affirmative vote of the holders
of at least a majority of the shares of each such Affected Series
outstanding at the time (each such Affected Series voting as a separate
class).
Voting provisions will not apply with respect to shares of Municipal
Preferred if, at or prior to the time when a vote is required, such shares shall
have been (i) redeemed or (ii) called for redemption and sufficient funds shall
have been deposited in trust to effect such redemption.
The Board of Trustees may, without shareholder approval, amend, alter or
repeal any or all of the definitions and related provisions required to be
contained in the Statement by the rating agencies in the event the Trust
receives confirmation from Moody's or Standard & Poor's, or both, as
appropriate, that any such amendment, alteration or repeal would not impair the
ratings then assigned by Moody's and Standard & Poor's to shares of Municipal
Preferred.
RATING AGENCY GUIDELINES
The Trust intends that, so long as shares of Municipal Preferred are
outstanding, the composition of its portfolio will reflect guidelines
established by at least one of Moody's or Standard & Poor's in connection with
the Trust's receipt on the Date of Original Issue of the shares of Municipal
Preferred of ratings of "Aaa" from Moody's or AAA from Standard & Poor's.
Moody's and Standard & Poor's, nationally recognized independent rating
agencies, issue ratings for various securities reflecting their perceived
creditworthiness of such securities. The guidelines described below have been
developed by Moody's and Standard & Poor's in connection with other issuances of
asset-backed and similar securities, including debt obligations and adjustable
rate preferred shares, generally on a case-by-case basis through discussions
with the issuers of those securities. The guidelines are designed to ensure that
assets underlying outstanding debt or preferred shares will be sufficiently
varied and will be of sufficient quality and amount to justify investment grade
ratings. The guidelines do not have the force of law, but have been adopted by
the Trust in order to satisfy current requirements necessary for Moody's or
Standard & Poor's, or both, to issue the above-described ratings for shares of
Municipal Preferred, which ratings are generally relied upon by investors in
purchasing such securities. In the context of a closed-end investment company
such as the Trust, therefore, the guidelines provide a set of tests for
portfolio composition and asset coverage that supplement (and in some cases are
more restrictive than) the applicable requirements under the 1940 Act. A rating
agency's guidelines will apply to shares of Municipal Preferred only so long as
such rating agency is rating such shares. The Board of Trustees may, without
shareholder approval, amend, alter or repeal any or all of the definitions and
related provisions which have been adopted by the Trust pursuant to the rating
agency guidelines in the event the Trust receives confirmation from Moody's or
Standard & Poor's, or both, as appropriate, that any such change would not
impair the ratings then assigned by Moody's and Standard & Poor's to shares of
Municipal Preferred.
So long as either Standard & Poor's or Moody's, or both, are rating the
shares of Municipal Preferred, the Trust may not, among other things, (1) buy or
sell futures contracts, write, purchase or sell options on futures contracts or
write put or call options on portfolio securities except to the extent set forth
in the Statement, which include the restrictions set forth as Appendix E to this
Statement of Additional Information, (2) borrow money, except that the Trust
may, without obtaining the written confirmation described below, borrow money
for the purpose of clearing securities transactions if (a) the Municipal
Preferred Basic Maintenance Amount would continue to be satisfied after giving
effect to such borrowing (which shall mean, for purposes of the calculation of
the Municipal Preferred Basic Maintenance Amount, adding the amount of the
liability for such borrowing to the calculation of the Municipal Preferred Basic
Maintenance Amount) and (b) such borrowing (i) is privately arranged with a bank
or other person and is evidenced by a promissory note or other evidence of
indebtedness that is not intended to be publicly distributed or (ii) is for
"temporary purposes," is evidenced by a promissory note or other evidence of
indebtedness and is an amount not exceeding 5 per centum of the value of the
total assets of the Trust at the time of the borrowing (for purposes of the
foregoing, "temporary purpose" means that the borrowing is to be repaid within
sixty days and is not to be extended or renewed), (3) issue additional shares of
Municipal Preferred or any class or series of shares ranking prior to or on a
parity with the shares of Municipal Preferred with respect to the payment of
dividends or the distribution of assets upon dissolution, liquidation or winding
up of the Trust, or reissue any shares of Municipal Preferred previously
purchased or redeemed by the Trust, (4) engage in any short sales of securities,
(5) lend any securities, (6) merge or consolidate into or with any corporation,
(7) change the Trust's primary Pricing Services, or (8) enter into reverse
repurchase agreements, unless in each case (except as described above) it has
received confirmation from Standard & Poor's or Moody's, or both, as
appropriate, that any such action would not impair the rating then assigned by
such rating agency to shares of Municipal Preferred. While the Trust does not
presently intend to borrow, and while the Trust is restricted under the 1940 Act
from borrowing in excess of 33 1/3% of its total assets and is otherwise
restricted from borrowing pursuant to rating agency guidelines, under certain
circumstances and notwithstanding adverse interest rate or market conditions,
the Trust is permitted to borrow for temporary or emergency purposes (e.g., to
make required distributions or pay dividends) or to repurchase shares when such
borrowing is deemed to be in the best interest of the common shareholders. See
"Repurchase of Common Shares" herein and "Repurchase of Common Shares;
Conversion to Open-end Fund" in the Prospectus for the circumstances under which
the Trust may purchase Common Shares and incur indebtedness in connection
therewith. Should the Trust borrow, the Trust would be required to pay when due
the interest obligation on any debt incurred by the Trust before it would be
able to pay dividends on shares of Municipal Preferred, and it is likely that
the Trust would be required to pay the principal amount of any such debt prior
to meeting the liquidation preference of the shares of Municipal Preferred.
Because the interest expense on borrowings by the Trust will reduce the Trust's
net investment earnings available to pay dividends on shares of Municipal
Preferred, borrowing may impair the Trust's ability to pay such dividends on
shares of Municipal Preferred. This risk is heightened in the event the Trust
incurs variable rate debt, the interest rate on which may increase with
increases in prevailing market rates.
ASSET MAINTENANCE
1940 ACT MUNICIPAL PREFERRED ASSET COVERAGE. The Trust will be required under
rating agency guidelines to maintain, as of the last Business Day of each month
on which any shares of Municipal Preferred are outstanding, asset coverage of at
least 200% with respect to such shares (or such other asset coverage as may in
the future be specified in or under the 1940 Act as the minimum asset coverage
for senior securities which are shares of a closed-end investment company as a
condition of declaring dividends on its Common Shares). If the Trust fails to
maintain such asset coverage in accordance with the requirements of the rating
agency or agencies then rating the shares of Municipal Preferred ("1940 Act
Municipal Preferred Asset Coverage") and such failure is not cured as of the
last Business Day of the following month (the "1940 Act Cure Date"), the Trust
will be required under certain circumstances to redeem certain of the shares of
Municipal Preferred. See "Redemption" below.
MUNICIPAL PREFERRED BASIC MAINTENANCE AMOUNT. The Trust will be required under
rating agency guidelines to maintain, as of each Business Day (a "Valuation
Date") on which shares of Municipal Preferred are outstanding, assets having in
the aggregate a Discounted Value at least equal to the Municipal Preferred Basic
Maintenance Amount established by the rating agency or agencies then rating the
shares of Municipal Preferred. If the Trust fails to meet such requirement on
any Valuation Date and such failure is not cured on or before the second
Business Day after such Valuation Date (the "Municipal Preferred Basic
Maintenance Cure Date"), the Trust will be required under certain circumstances
to redeem certain of the shares of Municipal Preferred. See "Redemption" below.
The "Municipal Preferred Basic Maintenance Amount" as of any Valuation Date
is defined as the dollar amount equal to the sum of:
(A) (i) the product of the number of shares of Municipal Preferred
outstanding on such date multiplied by $25,000 (plus the product of the
number of shares of any other series of Preferred Shares outstanding on such
date multiplied by the liquidation preference of such shares), plus any
redemption premium applicable to shares of Municipal Preferred (or other
Preferred Shares) then subject to redemption;
(ii) the aggregate amount of dividends that will have accumulated at
the Applicable Rate (whether or not earned or declared) to (but not
including) the first Dividend Payment Date for each share of Municipal
Preferred outstanding that follows such Valuation Date (plus the
aggregate amount of dividends, whether or not earned or declared, that
will have accumulated in respect of other outstanding Preferred Shares
to, but not including, the first respective dividend payment dates for
such other shares that follow such Valuation Date);
(iii) subject to certain exceptions, the aggregate amount of
dividends that would accumulate on shares of Municipal Preferred
outstanding from such first Dividend Payment Date through the 49th day
after such Valuation Date, at the Maximum Rate (calculated as if such
Valuation Date were the Auction Date for the Rate Period commencing on
such Dividend Payment Date) for a Minimum Rate Period thereof to
commence on such Dividend Payment Date, assuming, solely for purposes of
the foregoing, that if on such Valuation Date the Trust shall have
delivered a Notice of Special Rate Period to the Auction Agent with
respect to such shares, such Maximum Rate shall be the higher of (a) the
Maximum Rate for the Special Rate Period of such shares to commence on
such Dividend Payment Date and (b) the Maximum Rate for a Minimum Rate
Period of such shares to commence on such Dividend Payment Date,
multiplied by the Volatility Factor applicable to a Minimum Rate Period,
or, in the event the Trust shall have delivered a Notice of Special Rate
Period to the Auction Agent with respect to such shares designating a
Special Rate Period consisting of 49 Rate Period Days or more, the
Volatility Factor applicable to a Special Rate Period of that length
(plus the aggregate amount of dividends that would accumulate at the
maximum dividend rate or rates on any other Preferred Shares outstanding
from such respective dividend payment dates through the 49th day after
such Valuation Date, as established by or pursuant to the respective
statements establishing and fixing the rights and preferences of such
other Preferred Shares);
(iv) the amount of anticipated Trust expenses for the 90 days
subsequent to such Valuation Date;
(v) the amount of the Trust's Maximum Potential Gross-up Payment
Liability as of such Valuation Date; and
(vi) any current liabilities as of such Valuation Date to the extent
not reflected in any of (A)(i) through (A)(v) (including, without
limitation, any payables for Municipal Obligations purchased as of such
Valuation Date and any liabilities incurred for the purpose of clearing
securities transactions) less
(B) the value of any Trust assets irrevocably deposited by the Trust for
the payment of any of (A)(i) through (A)(vi), all as calculated in
accordance with the requirements of the rating agency or agencies then
rating the shares of Municipal Preferred.
For purposes of the foregoing, "Maximum Potential Gross-up Payment
Liability," as of any Valuation Date, means the aggregate amount of Gross-up
Payments that would be due if the Trust were to make Taxable Allocations, with
respect to any taxable year, estimated based upon dividends paid and the amount
of undistributed realized net capital gain and other taxable income earned by
the Trust, as of the end of the calendar month immediately preceding such
Valuation Date, and assuming such Gross-up Payments are fully taxable.
In managing the Trust's portfolio, the Adviser will not alter the
composition of the Trust's portfolio if, in the reasonable belief of the
Adviser, the effect of any such alteration would be to cause the Trust to have
Eligible Assets with an aggregate Discounted Value, as of the immediately
preceding Valuation Date, less than the Municipal Preferred Basic Maintenance
Amount as of such Valuation Date; provided, however, that in the event that, as
of the immediately preceding Valuation Date, the aggregate Discounted Value of
the Trust's Eligible Assets exceeded the Municipal Preferred Basic Maintenance
Amount by 5% or less, the Adviser will not alter the composition of the Trust's
portfolio in a manner reasonably expected to reduce the aggregate Discounted
Value of the Trust's Eligible Assets unless the Trust shall have confirmed that,
after giving effect to such alteration, the aggregate Discounted Value of the
Trust's Eligible Assets would exceed the Municipal Preferred Basic Maintenance
Amount.
Upon any failure to maintain the required Discounted Value, the Trust will
seek to alter the composition of its portfolio to reattain the Municipal
Preferred Basic Maintenance Amount on or prior to the Municipal Preferred Basic
Maintenance Cure Date, thereby incurring additional transaction costs and
possible losses and/or gains on dispositions of portfolio securities.
On or before the third Business Day after a Valuation Date on which the
Trust fails to meet the Municipal Preferred Basic Maintenance Amount, and on the
third Business Day after the Municipal Preferred Basic Maintenance Cure Date
with respect to such Valuation Date, the Trust is required to deliver to the
Auction Agent (so long as either Moody's or Standard & Poor's is rating the
shares of Municipal Preferred) a report with respect to the calculation of the
Municipal Preferred Basic Maintenance Amount and the value of its portfolio
holdings as of the date of such failure or such cure date, as the case may be (a
"Municipal Preferred Basic Maintenance Report"). The Trust will also deliver, as
required, a Municipal Preferred Basic Maintenance Report to the Auction Agent,
Moody's (if Moody's is then rating the shares of Municipal Preferred) and
Standard & Poor's (if Standard & Poor's is then rating the shares of Municipal
Preferred) as of the last Business Day of each January, April, July and October
of each year, commencing on January 31, 2001, in each case on or before the
third Business Day after such day, and Standard & Poor's, as of any biweekly
Valuation Date, in each case on or before the third Business Day after such day
for the first year. The Trust will also deliver a Municipal Preferred Basic
Maintenance Report to Moody's (if Moody's is then rating the shares of the
Municipal Preferred) and Standard & Poor's (if Standard & Poor's is then rating
the shares of the Municipal Preferred) if and when requested by Standard &
Poor's or Moody's for any Valuation Date, on or before the third Business Day
after such request. Within ten Business Days after delivery of such report
relating to the last Business Day of each January, April, July and October of
each year, commencing January 31, 2001, the Trust will deliver a letter prepared
by the Trust's independent accountants regarding the accuracy of the
calculations made by the Trust in its most recent Municipal Preferred Basic
Maintenance Report. If any such letter prepared by the Trust's independent
accountants shows that an error was made in the most recent Municipal Preferred
Basic Maintenance Report, the calculation or determination made by the Trust's
independent accountants will be conclusive and binding on the Trust.
The Discount Factors and guidelines for determining the market value of the
Trust's portfolio holdings, described below, have been based by the rating
agencies on criteria such as the sensitivity of the market value of the relevant
asset to changes in interest rates, the liquidity and depth of the market for
the relevant asset, the credit quality of the relevant asset (for example, the
lower the rating of a debt obligation, the higher the related discount factor)
and the frequency with which the relevant asset is marked to market. The ratings
may be changed, suspended or withdrawn as a result of changes in, or the
unavailability of, such information.
STANDARD & POOR'S AAA RATING GUIDELINES. For purposes of calculating the
Discounted Value of the Trust's portfolio under current Standard & Poor's
guidelines, the fair market value of Municipal Obligations eligible for
consideration as Standard & Poor's Eligible Assets must be discounted by certain
discount factors set forth in the table below ("Standard & Poor's Discount
Factors"). The Discounted Value of a Municipal Obligation under Standard &
Poor's guidelines is the fair market value thereof divided by the Standard &
Poor's Discount Factor. The Standard & Poor's Discount Factor used to discount a
particular Municipal Obligation will be determined by reference to the "Standard
& Poor's Exposure Period" (currently, three Business Days) and the Standard &
Poor's rating on such Municipal Obligation. Standard & Poor's Discount Factors
for a range of exposure periods are set forth below:
<TABLE>
<CAPTION>
STANDARD & POOR'S DISCOUNT FACTORS RATING CATEGORY
---------------------------------------------------------------------
EXPOSURE PERIOD AAA* AA* A* BBB* UNRATED** ZEROS***
<S> <C> <C> <C> <C> <C> <C>
45 Business Days ..................... 190% 195% 210% 250% 220% 441.8%
25 Business Days ..................... 170 175 190 230 220 441.8
10 Business Days ..................... 155 160 175 215 220 441.8
7 Business Days ...................... 150 155 170 210 220 441.8
3 Business Days ...................... 130 135 150 190 220 441.8
------------
* Standard & Poor's rating.
** Standard & Poor's Eligible Assets not rated or rated less than BBB by Standard & Poor's and not rated at
least the equivalent of an "A" rating by another nationally recognized credit rating agency.
*** Municipal Obligations which are not interest bearing or do not pay interest at least semi-annually and
that are rated AAA by Standard & Poor's.
</TABLE>
Since the Standard & Poor's Exposure Period currently applicable to the
Trust is three Business Days, the Standard & Poor's Discount Factors currently
applicable to Standard & Poor's Eligible Assets will be determined by reference
to the factors set forth opposite the line entitled "3 Business Days."
Notwithstanding the foregoing, (i) the Standard & Poor's Discount Factor for
short-term Municipal Obligations will be 115%, so long as such Municipal
Obligations are rated A-1+ or SP-1+ by Standard & Poor's and mature or have a
demand feature exercisable within 30 days or less, 120% if such Municipal
Obligations are rated A-1 or SP-1- by Standard & Poor's and mature or have a
demand feature exercisable within 30 days or less, or 125% if such Municipal
Obligations are not rated by Standard & Poor's but are rated VMIG-1, P-1 or
MIG-1 by Moody's; provided, however, that any such Moody's-rated short-term
Municipal Obligations which have demand features exercisable within 30 days or
less must be backed by a letter of credit, liquidity facility or guarantee from
a bank or other financial institution with a short-term rating of at least A-1+
from Standard & Poor's; (ii) no Standard & Poor's Discount Factor will be
applied to cash; and (iii) except as set forth in clause (i) above, in the case
of any Municipal Obligation that is not rated by Standard & Poor's or rated less
than BBB by Standard & Poor's but qualifies as a Standard & Poor's Eligible
Asset pursuant to clause (1)(c) of the following paragraph, such Municipal
Obligation will be deemed to have a Standard & Poor's rating one full rating
category lower than the Standard & Poor's rating category that is the equivalent
of the rating category in which such Municipal Obligation is placed by another
nationally recognized credit rating agency. For purposes of the foregoing,
Anticipation Notes rated SP-1+ or, if not rated by Standard & Poor's, rated
MIG-1 or VMIG-1 by Moody's, which do not mature or have a demand feature at par
exercisable in 30 days and which do not have a long-term rating, will be
considered to be short-term Municipal Obligations. In calculating the Discounted
Value of the Trust's portfolio (1) Standard & Poor's Discount Factors will be
applied to futures and Inverse Floaters and (2) a Discount Factor of 441.8% will
be applied to Municipal Obligations rated AAA by Standard & Poor's which are not
interest bearing or do not pay interest at least semi-annually.
All Trust assets shall be valued at trade date in determining Standard &
Poor's Eligible Assets. The Standard & Poor's guidelines impose certain minimum
issue size, issuer, geographical diversification and other requirements for
purposes of determining Standard & Poor's Eligible Assets. Solely for purposes
of this definition, the term "Municipal Obligation" means any obligation the
interest on which is exempt from regular federal income taxation and which is
issued by any of the fifty United States, the District of Columbia or any of the
territories of the United States, their subdivisions, counties, cities, towns,
villages, school districts and agencies (including authorities and special
districts created by the states), and federally sponsored agencies such as local
housing authorities. Notwithstanding the foregoing limitations:
(1) In order to be considered Standard & Poor's Eligible Assets,
Municipal Obligations owned by the Trust must:
(a) be interest bearing and pay interest at least semi-annually
(except as stated in number five (5) below);
(b) be payable in U.S. dollars with respect to principal and
interest;
(c) in the case of Anticipation Notes that are Grant Anticipation
Notes or Bond Anticipation Notes, be rated by Standard & Poor's;
(d) not be private placements (except in the case of Inverse
Floaters);
(e) be part of an issue (excluding Escrowed Bonds that are legally
defeased) with an original issue size of at least $20 million or, if of
an issue with an original issue size below $20 million (but in no event
lower than $10 million), be issued by an issuer with a total of at least
$50 million of securities outstanding; and
(f) is not subject to a covered call or covered put option written
by the Trust.
(2) Municipal Obligations (excluding Escrowed Bonds) of any one issuer
or guarantor (excluding bond insurers) will be considered Standard & Poor's
Eligible Assets only to the extent the Market Value of such Municipal
Obligations does not exceed 10% of the aggregate Market Value of Standard &
Poor's Eligible Assets, provided that 2% is added to the applicable Standard
& Poor's Discount Factor for every 1% by which the Market Value of such
Municipal Obligations exceeds 5% of the aggregate Market Value of Standard &
Poor's Eligible Assets, and provided that Municipal Obligations (excluding
Escrowed Bonds) not rated or rated less than BBB by Standard & Poor's and
not rated at least A by another nationally recognized credit rating agency
of any one issuer or guarantor (excluding bond insurers) shall constitute
Standard & Poor's Eligible Assets only to the extent the Market Value of
such Municipal Obligations does not exceed 5% of the aggregate Market Value
of Standard & Poor's Eligible Assets.
(3) Municipal Obligations not rated at least BBB or not rated by
Standard & Poor's and not rated at least A by another nationally recognized
credit rating agency will be considered Standard & Poor's Eligible Assets
only to the extent the Market Value of such Municipal Obligations does not
exceed 50% of the aggregate Market Value of Standard & Poor's Eligible
Assets; provided, however, that if the Market Value of such Municipal
Obligations exceeds 50% of the aggregate Market Value of Standard & Poor's
Eligible Assets, a portion of such Municipal Obligations (selected by the
Trust) shall not be considered Standard & Poor's Eligible Assets, so that
the Market Value of such Municipal Obligations (excluding such portion) does
not exceed 50% of the aggregate Market Value of Standard & Poor's Eligible
Assets.
(4) Long-term Municipal Obligations (excluding Escrowed Bonds) issued by
issuers in any one state or territory will be considered Standard & Poor's
Eligible Assets only to the extent the Market Value of such Municipal
Obligations does not exceed 25% of the aggregate Market Value of Standard &
Poor's Eligible Assets.
(5) Municipal Obligations which are not interest bearing or do not pay
interest at least semi-annually shall be considered Standard & Poor's
Eligible Assets if rated AAA by Standard & Poor's.
MOODY'S "AAA" RATING GUIDELINES. For purposes of calculating the Discounted
Value of the Trust's portfolio under current Moody's guidelines, Municipal
Obligations eligible for consideration as Moody's Eligible Assets must be
discounted by certain discount factors set forth in the table below ("Moody's
Discount Factors"). All Trust assets shall be valued at trade date in
determining Moody's Eligible Assets. The Discounted Value of a Municipal
Obligation under Moody's guidelines is, as of any Valuation Date, (i) with
respect to a Moody's Eligible Asset that is not currently callable as of such
Valuation Date at the option of the issuer thereof, the quotient of the market
value thereof divided by the applicable Moody's Discount Factor, or (ii) with
respect to a Moody's Eligible Asset that is currently callable as of such
Valuation Date at the option of the issuer thereof, the quotient of (a) the
lesser of the market value or call price thereof, including any call premium,
divided by (b) the applicable Moody's Discount Factor. The Moody's Discount
Factor used to discount a particular Municipal Obligation will be determined by
reference to the "Moody's Exposure Period" (currently, the period commencing on
a given Valuation Date and ending 49 days thereafter) and the Moody's rating on
such Municipal Obligation. Moody's Discount Factors for a range of exposure
periods are set forth below:
<TABLE>
<CAPTION>
MOODY'S DISCOUNT FACTORS RATING CATEGORY
EXPOSURE PERIOD Aaa* Aa* A* Baa* OTHER** (V)MIG-1*** SP-1+**** UNRATED*****
<S> <C> <C> <C> <C> <C> <C> <C> <C>
7 weeks ........ 151% 159% 166% 173% 187% 136% 148% 225%
8 weeks or less
but greater
than 7 weeks . 154 161 168 176 190 137 149 231
9 weeks or less
but greater
than 8 weeks . 156 163 170 177 192 138 150 240
------------
* Moody's rating.
** Municipal Obligations not rated by Moody's but rated BBB by Standard & Poor's.
*** Municipal Obligations rated MIG-1 or VMIG-1, which do not mature or have a demand feature at par exercisable in
30 days and which do not have a long-term rating.
**** Municipal Obligations not rated by Moody's but rated SP-1+ by Standard & Poor's, which do not mature or have a
demand feature at par exercisable in 30 days and which do not have a long-term rating.
***** Municipal Obligations not rated or rated lower than Baa3 by Moody's and not rated or rated lower than BBB by
Standard & Poor's.
</TABLE>
Since the Moody's Exposure Period currently applicable to the Trust is 49
days, the Moody's Discount Factors currently applicable to Moody's Eligible
Assets will be determined by reference to the factors set forth opposite the
line entitled "7 weeks." Notwithstanding the foregoing, (i) the Moody's Discount
Factor for short-term Municipal Obligations will be 115%, so long as such
Municipal Obligations are rated at least MIG-1, VMIG-1 or P-1 by Moody's and
mature or have a demand feature at par exercisable in 30 days or less or 125% so
long as such Municipal Obligations are rated at least A-1+/AA or SP-1+/AA by
Standard & Poor's and mature or have a demand feature at par exercisable in 30
days or less and (ii) no Moody's Discount Factor will be applied to cash or
futures, options and similar instruments (to the extent such securities are
Moody's Eligible Assets).
The Moody's guidelines impose certain minimum issue size, issuer,
geographical diversification and other requirements for purposes of determining
Moody's Eligible Assets, as set forth in the table below:
MINIMUM MAXIMUM MAXIMUM
ISSUE SIZE UNDERLYING STATE OR TERRITORY
RATING ($ MILLIONS)* OBLIGOR (%) CONCENTRATION(%)
Aaa ...................... 10 100 100
Aa ....................... 10 20 60
A ........................ 10 10 40
Baa ...................... 10 6 20
Other** .................. 10 4 12
* Excludes Escrowed Bonds that are legally defeased.
** Municipal Obligations not rated by Moody's or rated lower than Baa3 by
Moody's and not rated by Standard & Poor's or rated lower than BBB by
Standard & Poor's ("Unrated Moody's Municipal Obligations"), together with
any Municipal Obligations rated BBB by Standard & Poor's.
For purposes of the foregoing table, the percentages provided, for a given
rating, in the columns entitled "Maximum Underlying Obligor" and "Maximum State
or Territory Concentration" shall apply to the aggregate total of the Municipal
Obligations in the rating category indicated and all rated Municipal Obligations
in lower rating categories, as well as unrated Municipal Obligations that are
Moody's Eligible Assets.
Current Moody's guidelines require that Municipal Obligations constituting
Moody's Eligible Assets (i) pay interest in cash, (ii) if applicable, not have
suspended ratings, and (iii) not be subject to a covered call or a covered put
option written by the Trust. For purposes of determining the Moody's Discount
Factors applicable to such Standard & Poor's-rated Municipal Obligations, any
such Municipal Obligation (excluding short-term Municipal Obligations) will be
deemed to have a Moody's rating which is one full rating category lower than its
Standard & Poor's rating. For purposes of applying the foregoing requirements,
Municipal Obligations shall be deemed to be rated BBB by Standard & Poor's if
rated BBB-, BBB or BBB+ by Standard & Poor's, and Municipal Obligations rated
MIG-1, VMIG-1, or P-1, or, if not rated by Moody's, rated A-1+/AA or SP-1+/AA by
Standard & Poor's, will be considered to have a long-term rating of A. In
general, Municipal Obligations which are not rated by Moody's or Standard &
Poor's may comprise no more than 40% of the aggregate Market Value of Moody's
Eligible Assets.
The Trust will enter into futures and options transactions only for bona
fide hedging purposes and not for leveraging or speculative purposes. So long as
either Standard & Poor's or Moody's is rating the Municipal Preferred, the Trust
will only engage in futures or options transactions in accordance with
guidelines of such ratings agencies and, to the extent transactions would not be
permitted by such guidelines, only after it has received written confirmation
from Standard & Poor's or Moody's, as appropriate, that such transactions would
not impair the ratings then assigned by such rating agency to shares of
Municipal Preferred. The guidelines in effect with respect to futures and
options transactions in which the Trust may engage are set forth in the
Statement and are included as Appendix E to this Statement of Additional
Information.
REDEMPTION
OPTIONAL REDEMPTION. Except as described below,
(i) shares of Municipal Preferred are redeemable, at the option of the
Trust, as a whole or from time to time in part, on the second Business Day
preceding any Dividend Payment Date therefor, out of funds legally available
therefor in accordance with the Declaration, the Statement and applicable
law, at a redemption price per share equal to the sum of $25,000 plus an
amount equal to accumulated but unpaid dividends thereon (whether or not
earned or declared) to (but not including) the date fixed for redemption;
provided, however, that (1) shares of Municipal Preferred may not be
redeemed in part if after such partial redemption fewer than 500 shares
remain outstanding; (2) unless otherwise provided in the Statement, shares
of Municipal Preferred are redeemable by the Trust during the Initial Rate
Period thereof only on the second Business Day next preceding the last
Dividend Payment Date for such Initial Rate Period; and (3) subject to the
next succeeding sentence, the Notice of Special Rate Period relating to a
Special Rate Period of shares of Municipal Preferred, as delivered to the
Auction Agent and filed with the Secretary of the Trust, may provide that
such shares shall not be redeemable during the whole or any part of such
Special Rate Period (except as provided in (ii) below) or shall be
redeemable during the whole or any part of such Special Rate Period only
upon payment of such redemption premium or premiums as shall be specified
therein ("Special Redemption Provisions"); and
(ii) shares of Municipal Preferred are redeemable, at the option of the
Trust, as a whole but not in part, out of funds legally available therefor
in accordance with the Declaration, the Statement and applicable law, on the
first day following any Dividend Period thereof included in a Rate Period of
more than 364 Rate Period Days if, on the date of determination of the
Applicable Rate for such shares for such Rate Period, such Applicable Rate
equaled or exceeded on such date of determination the Treasury Note Rate for
such Rate Period, at a redemption price of $25,000 per share plus an amount
equal to accumulated but unpaid dividends thereon (whether or not earned or
declared) to (but not including) the date fixed for redemption.
A Notice of Special Rate Period relating to shares of Municipal Preferred
for a Special Rate Period may contain Special Redemption Provisions only if the
Board of Trustees, after consultation with the Broker-Dealer or Broker-Dealers
for such Special Rate Period of such shares, determines that such Special
Redemption Provisions are in the best interest of the Trust.
If fewer than all of the outstanding shares of Municipal Preferred are to be
redeemed as set forth above, the number of shares to be redeemed shall be
determined by the Board of Trustees, and such shares shall be redeemed pro rata
from the holders of record of shares of such series (initially Cede & Co. as
nominee of the Securities Depository) in proportion to the number of such shares
held by such holders. Since the nominee of the Securities Depository is the only
record holder of shares of Municipal Preferred, the Securities Depository will
determine the number of shares to be redeemed from the accounts of the Agent
Members. The Agent Members, in turn, may determine to redeem shares from some
persons listed on their records as beneficial owners (which may include an Agent
Member holding shares for its own account) without redeeming shares from the
accounts of other persons listed on their records as beneficial owners.
The Trust may not mail a Notice of Redemption relating to an optional
redemption as described above on any date unless on such date (a) the Trust has
available certain Deposit Securities with maturity or tender dates not later
than the day preceding the applicable redemption date and having a value not
less than the amount (including any applicable premium) due to holders of shares
of Municipal Preferred by reason of the redemption of such shares on such
redemption date and (b) the Discounted Value of Moody's Eligible Assets (if
Moody's is then rating the shares of Municipal Preferred) and the Discounted
Value of Standard & Poor's Eligible Assets (if Standard & Poor's is then rating
the shares of Municipal Preferred) each at least equal the Municipal Preferred
Basic Maintenance Amount and would at least equal the Municipal Preferred Basic
Maintenance Amount immediately subsequent to such redemption if such redemption
were to occur on such date. For purposes of determining in clause (b) of the
preceding sentence whether the Discounted Value of Moody's Eligible Assets at
least equals the Municipal Preferred Basic Maintenance Amount, the Moody's
Discount Factors applicable to Moody's Eligible Assets will be determined by
reference to the first Moody's Exposure Period longer than the Moody's Exposure
Period then applicable to the Trust.
MANDATORY REDEMPTION. The Trust will be required to redeem, at a redemption
price equal to $25,000 per share plus accumulated but unpaid dividends thereon
(whether or not earned or declared) to (but not including) the date fixed by the
Board of Trustees for redemption (such amount, together with the redemption
prices described above under "Optional Redemption," being herein referred to as
the "Redemption Price"), certain of the shares of Municipal Preferred to the
extent permitted under the 1940 Act, the Declaration, the Statement and any
applicable law, if the Trust fails to maintain the Municipal Preferred Basic
Maintenance Amount or the 1940 Act Municipal Preferred Asset Coverage in
accordance with the requirements of the rating agency or rating agencies then
rating the shares of Municipal Preferred and such failure is not cured on or
before the Municipal Preferred Basic Maintenance Cure Date or the 1940 Act Cure
Date (herein respectively referred to as a "Cure Date"), as the case may be. The
number of shares of Municipal Preferred to be redeemed will be equal to the
lesser of (a) the minimum number of shares of Municipal Preferred, together with
all other Preferred Shares subject to redemption or retirement, the redemption
of which, if deemed to have occurred immediately prior to the opening of
business on the Cure Date, would have resulted in the satisfaction of the
Municipal Preferred Basic Maintenance Amount or the 1940 Act Municipal Preferred
Asset Coverage, as the case may be, on such Cure Date (provided, however, that,
if there is no such minimum number of shares of Municipal Preferred and other
Preferred Shares the redemption or retirement of which would have had such
result, all shares of Municipal Preferred and Preferred Shares then outstanding
will be redeemed), and (b) the maximum number of shares of Municipal Preferred,
together with all other Preferred Shares subject to redemption or retirement,
that can be redeemed out of funds expected to be legally available therefor. In
determining the shares of Municipal Preferred required to be redeemed in
accordance with the foregoing, the Trust will allocate the number of shares
required to be redeemed to satisfy the Municipal Preferred Basic Maintenance
Amount or the 1940 Act Municipal Preferred Asset Coverage, as the case may be,
pro rata among shares of Municipal Preferred and any other Preferred Shares
subject to redemption or retirement.
The Trust is required to effect such a mandatory redemption not earlier than
20 days and not later than 40 days after such Cure Date, except that if the
Trust does not have funds legally available under the Declaration, the Statement
and applicable law for the redemption of all of the required number of shares of
Municipal Preferred and other Preferred Shares which are subject to mandatory
redemption or retirement or the Trust otherwise is unable to effect such
redemption on or prior to 40 days after such Cure Date, the Trust will redeem
those shares of Municipal Preferred and other Preferred Shares which it was
unable to redeem on the earliest practicable date on which it is able to effect
such redemption. If fewer than all of the outstanding shares of Municipal
Preferred are to be redeemed pursuant to a mandatory redemption, the number of
shares to be redeemed shall be redeemed pro rata from the holders of such shares
in proportion to the number of such shares held by such holders, in the same
manner as described above in respect of optional redemptions of fewer than all
outstanding shares of Municipal Preferred.
NOTICE OF REDEMPTION. Notice of redemption shall be given by mailing the same to
each holder of the shares to be redeemed (initially Cede & Co. as nominee of the
Securities Depository), not less than 20 nor more than 45 days prior to the date
fixed for redemption thereof, to the respective addresses of such holders as the
same shall appear on the record books of the Trust ("Notice of Redemption").
Each such notice shall state (i) the redemption date; (ii) the number of shares
of Municipal Preferred to be redeemed; (iii) the CUSIP number for such shares;
(iv) the Redemption Price; (v) the place or places where certificate(s) for such
shares (properly endorsed or assigned for transfer, if the Board of Trustees
shall so require and the notice shall so state) are to be surrendered for
payment of the Redemption Price; (vi) that dividends on the shares to be
redeemed will cease to accumulate on such redemption date; and (vii) the
provisions of the Statement under which such redemption is made. If fewer than
all shares of Municipal Preferred held by any holder are to be redeemed, the
notice mailed to such holder shall also specify the number of shares to be
redeemed from such holder. The Trust may provide in any Notice of Redemption
relating to an optional redemption that such redemption is subject to one or
more conditions precedent and that the Trust shall not be required to effect
such redemption unless each such condition shall have been satisfied at the time
or times and in the manner specified in such Notice of Redemption.
OTHER REDEMPTION PROCEDURES. To the extent that any redemption for which a
Notice of Redemption has been mailed is not made by reason of the absence of
legally available funds therefor, such redemption will be made as soon as
practicable to the extent such funds become available. Failure to redeem shares
of Municipal Preferred will be deemed to exist at any time after the date
specified for redemption in a Notice of Redemption when the Trust shall have
failed, for any reason whatsoever, to deposit with the Auction Agent the
Redemption Price with respect to any shares for which such Notice of Redemption
has been mailed. Notwithstanding the fact that the Trust may not have redeemed
shares of Municipal Preferred for which a Notice of Redemption has been mailed,
dividends may be declared and paid on shares of Municipal Preferred and will
include those shares of Municipal Preferred for which a Notice of Redemption has
been mailed. The first two sentences of this paragraph shall not apply in the
event the Trust provides in any Notice of Redemption relating to an optional
redemption that such redemption is subject to one or more conditions precedent
and any such condition precedent shall not have been satisfied at the time or
times and in the manner specified in such Notice of Redemption.
Provided a Notice of Redemption has been mailed as described above, upon the
deposit with the Auction Agent (by noon on the Business Day fixed for redemption
thereby, in funds available on that Business Day in The City of New York, New
York) of funds sufficient to redeem the shares of Municipal Preferred that are
the subject of such notice, dividends on such shares will cease to accumulate
and such shares will no longer be deemed outstanding for any purpose, and all
rights of the holders of the shares so called for redemption will cease and
terminate, except the right of the holders thereof to receive the Redemption
Price, but without any interest or other additional amount, except as otherwise
provided above under "Dividends -- Determination of Dividend Rate" and "--
Gross-up Payments." Upon surrender in accordance with the Notice of Redemption
of the certificates for any shares so redeemed (properly endorsed or assigned
for transfer, if the Board of Trustees shall so require and the notice shall so
state), the Redemption Price shall be paid by the Auction Agent to the holders
of shares of Municipal Preferred subject to redemption. In the case that fewer
than all of the shares represented by any such certificate are redeemed, a new
certificate shall be issued, representing the unredeemed shares, without cost to
the holder thereof. The Trust will be entitled to receive from the Auction
Agent, promptly after the date fixed for redemption, any cash deposited with the
Auction Agent in excess of (i) the aggregate Redemption Price of the shares of
Municipal Preferred called for redemption on such date and (ii) all other
amounts to which holders of shares of Municipal Preferred called for redemption
may be entitled. Any funds so deposited that are unclaimed at the end of 90 days
from such redemption date will, to the extent permitted by law, be repaid to the
Trust, after which time the holders of shares of Municipal Preferred so called
for redemption may look only to the Trust for payment of the Redemption Price
and all other amounts to which they may be entitled. The Trust will be entitled
to receive, from time to time after the date fixed for redemption, any interest
on the funds so deposited.
Notwithstanding the foregoing, if any dividends on shares of Municipal
Preferred (whether or not earned or declared) are in arrears, no shares of
Municipal Preferred shall be redeemed unless all outstanding shares of Municipal
Preferred are simultaneously redeemed, and the Trust shall not purchase or
otherwise acquire any shares of Municipal Preferred; provided, however, that the
foregoing shall not prevent the purchase or acquisition of all outstanding
shares of Municipal Preferred pursuant to the successful completion of an
otherwise lawful purchase or exchange offer made on the same terms to, and
accepted by, holders of all outstanding shares of Municipal Preferred.
Except as described above with respect to redemptions and under "The Auction
-- Orders by Existing Holders and Potential Holders," the Declaration and the
Statement do not prohibit the Trust or any affiliate of the Trust from
purchasing or otherwise acquiring any shares of Municipal Preferred.
The Trust has the right to arrange for third parties to purchase from the
holders thereof shares of Municipal Preferred which are to be redeemed as
described above.
LIQUIDATION
Upon a dissolution, liquidation or winding up of the affairs of the Trust,
whether voluntary or involuntary, the holders of shares of Municipal Preferred
then outstanding will be entitled to receive and to be paid out of the assets of
the Trust available for distribution to its shareholders, before any payment or
distribution shall be made on the Common Shares or on any other class of shares
of the Trust ranking junior to the Municipal Preferred upon dissolution,
liquidation or winding up, an amount equal to the liquidation preference with
respect to such shares. The liquidation preference for shares of Municipal
Preferred shall be $25,000 per share, plus an amount equal to all dividends
thereon (whether or not earned or declared) accumulated but unpaid to (but not
including) the date of final distribution in same-day funds, together with any
applicable Gross-up Payments in connection with the dissolution, liquidation or
winding up of the Trust. After the payment to the holders of the shares of
Municipal Preferred of the full preferential amounts provided for as described
herein, the holders of Municipal Preferred as such shall have no right or claim
to any of the remaining assets of the Trust. In the event the assets of the
Trust available for distribution to the holders of shares of Municipal
Preferred, upon any dissolution, liquidation or winding up of the affairs of the
Trust, whether voluntary or involuntary, shall be insufficient to pay in full
all amounts to which such holders are entitled, no such distribution shall be
made on account of any other class or series of Preferred Shares ranking on a
parity with the shares of Municipal Preferred upon such dissolution, liquidation
or winding up unless proportionate distributive amounts shall be paid on account
of the shares of Municipal Preferred, ratably, in proportion to the full
distributable amounts for which holders of all such parity shares are
respectively entitled upon such dissolution, liquidation or winding up. Subject
to the rights of the holders of any series or class or classes of shares ranking
on a parity with the shares of Municipal Preferred with respect to the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust, after payment shall have been made in full to the holders
of the shares of Municipal Preferred as described herein, but not prior thereto,
any other series or class or classes of shares ranking junior to the shares of
Municipal Preferred with respect to the distribution of assets upon dissolution,
liquidation or winding up shall, subject to the respective terms and provisions
(if any) applying thereto, be entitled to receive any and all assets remaining
to be paid or distributed, and the holders of the shares of Municipal Preferred
shall not be entitled to share therein.
Neither the sale of all or substantially all the property or business of the
Trust, nor the merger or consolidation of the Trust into or with any trust,
corporation or other entity nor the merger or consolidation of any trust,
corporation or other entity into or with the Trust shall be a dissolution,
liquidation or winding up of the affairs of the Trust, whether voluntary or
involuntary, for the purposes of the foregoing paragraph.
REPURCHASE OF COMMON SHARES
The Trust is a closed-end management investment company and as such its
shareholders do not, and will not, have the right to redeem their shares of the
Trust. The Trust, however, may repurchase its common shares from time to time in
the open market or otherwise as and when it is deemed advisable by the Trustees.
Such repurchases will be made only when the Trust's common shares are trading at
a discount of 5 percent or more from the net asset value of those shares. The
Trust may incur debt to finance share repurchase transactions.
The common shares of the Trust trade in the open market at a price which is
a function of several factors, including their net asset value and yield. The
common shares of closed-end investment companies generally sell at market prices
varying from their net asset values. If the Trust repurchases its common shares
for a price below their net asset value, the net asset value of those common
shares that remain outstanding will be enhanced, but this does not necessarily
mean that the market price of those outstanding shares will be affected, either
positively or negatively. Further, interest on borrowings to finance share
repurchase transactions will reduce the Trust's net income.
TAX MATTERS
FEDERAL INCOME TAX MATTERS
The Trust has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, by meeting all
applicable requirements of Subchapter M, including requirements as to the nature
of the Trust's gross income, the amount of Trust distributions (as a percentage
of both the Trust's net investment income and its tax-exempt income), and the
composition of the Trust's portfolio assets. Because the Trust intends to
distribute all of its net investment income and net realized capital gains to
shareholders in accordance with the timing requirements imposed by the Code, it
is not expected that the Trust will be required to pay any federal income or
excise taxes.
However, if at any time when shares of Municipal Preferred are outstanding,
the Trust does not meet applicable asset coverage requirements, the Trust will
be required to suspend distributions to holders of Common Shares until the
requisite asset coverage is restored. Such a suspension of distributions may
cause the Trust to fail applicable distribution requirements under the Code,
which could result in liability for a 4% federal excise tax on undistributed
amounts, or could cause the Trust to fail to qualify as a regulated investment
company. If the Trust should fail to qualify as a regulated investment company
in any year for this or any other reason, the Trust would incur a regular
corporate federal income tax upon its taxable income and Trust distributions
would generally be taxable as ordinary dividend income to the shareholders.
The portion of the Trust's distributions of income that is attributable to
interest from tax-exempt securities will be designated by the Trust as an
"exempt-interest dividend" under the Code and will generally be exempt from
federal income tax in the hands of shareholders so long as at least 50% of the
total value of the Trust's assets consists of obligations described in Section
103(a) of the Code at the close of each quarter of the Trust's taxable year.
Distributions of tax-exempt interest earned from certain securities may,
however, be treated as an item of tax preference for shareholders under the
federal alternative minimum tax, and all exempt-interest dividends may increase
a corporate shareholder's alternative minimum tax. The percentage of income
designated as tax-exempt will be applied uniformly to all distributions by the
Trust of income made during each fiscal year of the Trust and may differ from
the percentage of distributions consisting of tax-exempt interest in any
particular month. Shareholders are required to report exempt-interest dividends
received from the Trust on their federal income tax returns.
In order for any distributions to holders of Municipal Preferred to be
eligible to be treated as exempt-interest dividends, the shares of Municipal
Preferred must be treated as equity for federal income tax purposes. Based in
part on certain representations made by the Trust to Bingham Dana LLP relating
to the lack of any present intention to redeem or purchase shares of Municipal
Preferred at any time in the future, it is the opinion of Bingham Dana LLP that
the shares of Municipal Preferred will constitute equity for federal income tax
purposes. This opinion relies in part on a published ruling of the Internal
Revenue Service stating that certain auction rate preferred stock similar in
many material respects to the Municipal Preferred represents equity. The opinion
of Bingham Dana LLP represents only its best legal judgment and is not binding
on the Internal Revenue Service or the courts. If the Internal Revenue Service
were successfully to assert that variable rate preferred stock such as the
Municipal Preferred should be treated as debt for federal income tax purposes,
dividends on shares of Municipal Preferred would be treated as taxable interest
for federal income tax purposes. In such event, dividends on shares of Municipal
Preferred would not be increased by the Trust and holders of shares of Municipal
Preferred would not be entitled to any additional distributions from the Trust
(including any Gross-up Payments) to offset the effect of paying federal income
tax on Trust distributions so recharacterized as interest. Bingham Dana LLP has
advised the Trust that, should the Internal Revenue Service pursue in court the
position that the shares of Municipal Preferred should be treated as debt for
federal income tax purposes, the Internal Revenue Service would be unlikely to
prevail.
The Trust may also recognize some ordinary income that is not tax-exempt, as
well as capital gains and losses as a result of the disposition of securities
and from certain futures transactions. Shareholders of the Trust normally will
have to pay federal income taxes, and any state or local taxes, on the non
exempt-interest dividends and capital gain distributions they receive from the
Trust; however, the Trust does not expect that the non-tax-exempt portion of
its ordinary income, if any, will be substantial. Because the Trust expects to
earn primarily tax-exempt interest income, it is expected that no Trust
dividends will qualify for the dividends received deduction for corporations.
Distributions of net capital gain (i.e., the excess of net long-term capital
gain over net short-term capital loss), whether paid in cash or reinvested in
additional shares, are taxable to shareholders as long-term capital gains for
federal income tax purposes without regard to the length of time the
shareholders have held their shares. Any Trust dividend that is declared in
October, November, or December of any calendar year, that is payable to
shareholders of record in such a month, and that is paid the following January
will be treated as if received by the shareholders on December 31 of the year in
which the dividend is declared. The Trust will notify shareholders regarding the
federal tax status of its distributions after the end of each calendar year.
The Internal Revenue Service requires that a regulated investment company
that has two or more classes of shares designate to each such class
proportionate amounts of each type of its income for each tax year based upon
the percentage of total dividends distributed to each class for such year. The
Trust intends each year to allocate, to the fullest extent practicable, net
tax-exempt interest income, net capital gain and other taxable income, if any,
between its Common Shares and Municipal Preferred shares, in proportion to the
total dividends paid to each class with respect to such year. To the extent
permitted under applicable law, the Trust reserves the right to make special
allocations of income within a class, consistent with the objective of the
Trust.
Any Trust distribution will have the effect of reducing the per share net
asset value of shares in the Trust by the amount of the distribution.
Shareholders purchasing shares shortly before the record date of any
distribution other than an exempt-interest dividend may thus pay the full price
for the shares and then effectively receive a portion of the purchase price back
as a taxable distribution. In addition, shareholders disposing of shares after
tax-exempt income has been accrued but not yet declared as a dividend should be
aware that a portion of the sales proceeds realized upon disposition of the
shares may reflect the existence of such accrued tax-exempt income, and that
this portion of the proceeds may be subject to tax as a capital gain even though
it would have been tax-exempt had it been declared as a dividend prior to the
disposition.
Interest on indebtedness incurred or continued by shareholders to purchase
or carry shares of the Trust will not be deductible for federal income tax
purposes to the extent attributable to exempt-interest dividends.
Exempt-interest dividends are taken into account in calculating the amount of
social security and railroad retirement benefits that may be subject to federal
income tax. Exempt-interest dividends paid from interest on certain private
activity bonds and certain industrial development bonds will not be tax-exempt
to any shareholder that is a "substantial user" (or is related to a "substantial
user") of the facilities financed by those bonds; persons who are, or are
related to, substantial users of such facilities should consult their tax
advisers before purchasing shares of the Trust.
In general, any gain or loss realized upon a taxable disposition of shares
of the Trust by a shareholder that holds such shares as a capital asset will be
treated as a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as a short-term capital gain or loss.
However, any loss realized upon a disposition of shares in the Trust held for
six months or less will be disallowed to the extent of any exempt-interest
dividends received with respect to those shares. If not disallowed, any such
loss will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares (or the
amount designated as undistributed capital gain with respect to those shares).
Any loss realized upon a disposition of shares may also be disallowed under
rules relating to wash sales.
From time to time the Trust may make a tender or repurchase offer for its
Common Shares. It is expected that the terms of any such offer will require a
tendering shareholder to tender all Common Shares, and dispose of all shares of
Municipal Preferred, held or considered under Code rules to be held by such
shareholder. Shareholders who tender all Common Shares and dispose of all shares
of Municipal Preferred held, or considered held, by them will be treated as
having sold such shares and generally will realize a capital gain or loss. If,
however, a shareholder tenders fewer than all of its Common Shares, or retains a
substantial portion of its Municipal Preferred, such shareholder may be treated
as having received a taxable dividend upon the tender of its Common Shares. In
such a case, there is a remote risk that non-tendering shareholders (including
holders of Municipal Preferred) will be treated as having received taxable
distributions from the Trust. Likewise, if the Trust redeems some but not all of
the Municipal Preferred held by a holder of Municipal Preferred and such holder
of Municipal Preferred is treated as having received a taxable dividend upon
such redemption, there is a remote risk that holders of Common Shares and
non-redeeming holders of Municipal Preferred will be treated as having received
taxable distributions from the Trust.
Any investment in zero coupon bonds, deferred interest bonds,
payment-in-kind bonds, certain stripped securities, and certain securities
purchased at a market discount will cause the Trust to recognize income prior to
the receipt of cash payments with respect to those securities. In order to
distribute this income and avoid a tax on the Trust, the Trust may be required
to borrow or to liquidate portfolio securities that it might otherwise have
continued to hold.
The Trust's transactions in options, if any, and futures contracts will be
subject to special tax rules that may affect the amount, timing, and character
of Trust income and distributions to shareholders. For example, certain
positions held by the Trust on the last business day of each taxable year will
be marked to market (i.e., treated as if closed out) on that day, and any gain
or loss associated with the positions will be treated as 60% long-term and 40%
short-term capital gain or loss. Certain positions held by the Trust that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute "straddles," and may be subject to special tax rules
that would cause deferral of Trust losses, adjustments in the holding periods of
Trust securities, and conversion of short-term capital losses into long-term
capital losses. Certain tax elections exist for straddles that may alter the
effects of these rules. The Trust will limit its activities in options, if any,
and futures contracts to the extent necessary to meet the requirements of
Subchapter M of the Code.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at the rate of 30%. The Trust intends
to withhold U.S. federal income tax at the rate of 30% (or any lower rate
permitted under an applicable treaty) on taxable dividends and other payments to
Non-U.S. Persons that are subject to such withholding. Different tax
consequences may result if such Non-U.S. Person is engaged in a trade or
business in the United States and the dividends or other payments received are
effectively connected with the conduct of that trade or business. Any amounts
overwithheld may be recovered by such persons by filing a claim for refund with
the U.S. Internal Revenue Service within the time period appropriate to such
claims. Distributions received from the Trust by Non-U.S. Persons also may be
subject to tax under the laws of their own jurisdictions.
The Trust is also required in certain circumstances to apply backup
withholding at the rate of 31% on taxable dividends and redemption proceeds paid
to any shareholder (including a Non-U.S. Person) who does not furnish to the
Trust certain information and certifications or who is otherwise subject to
backup withholding. Backup withholding will not, however, be applied to payments
that have been subject to 30% withholding. Backup withholding is not an
additional tax. Any amounts withheld from payments made to a shareholder may be
refunded or credited against such shareholder's United States federal income tax
liability, provided that the required information is furnished to the Internal
Revenue Service.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect, as
interpreted by rulings published by the Internal Revenue Service and judicial
decisions, that directly govern the taxation of the Trust and owners of shares
of Municipal Preferred. These provisions are subject to change, possibly with
retroactive effect. Shareholders are urged to consult their tax advisers for
more detailed information regarding the federal income tax consequences of any
investment in the Trust.
STATE INCOME TAX MATTERS
As long as it qualifies as a regulated investment company under the Code, the
Trust will not be required to pay Massachusetts income or excise taxes.
The exemption of exempt-interest dividends for federal income tax purposes
does not necessarily result in exemption under the tax laws of any state or
local taxing authority. Some states do exempt from tax that portion of the
exempt-interest dividend which represents interest received by a regulated
investment company on its holdings of tax-exempt securities of that state and
its political subdivisions and instrumentalities. Therefore, the Trust will
report annually to its shareholders the percentage of interest income earned by
the Trust during the preceding year from Municipal Bonds and will indicate, on a
state-by-state basis only, the source of such income. Residents of certain
states may be subject to an intangibles tax or a personal property tax on all or
a portion of the value of their shares.
Distributions of the Trust that are derived from interest on obligations of
the U.S. Government and certain of its agencies and instrumentalities (but
generally not from capital gains realized upon the disposition of such
obligations) may be exempt from state and local taxes. The Trust intends to
advise shareholders of the extent, if any, to which its distributions consist of
such interest. Shareholders are urged to consult their tax advisers regarding
the possible exclusion of a portion of their dividends for state and local
income tax purposes as well as more generally regarding the state and local tax
consequences of an investment in the Trust.
SHAREHOLDER LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Trust and provides for
indemnification and reimbursement of expenses out of the Trust's property for
any shareholder held personally liable for the obligations of the Trust. The
Declaration of Trust also provides that the Trust shall maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance) for
the protection of the Trust, its shareholders, Trustees, officers, employees and
agents covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the
Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are
not binding upon the Trustees individually but only upon the property of the
Trust and that the Trustees will not be liable for errors of judgment or
mistakes of fact or law, but nothing in the Declaration of Trust protects a
Trustee against any liability to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of his office.
CUSTODIAN AND SHAREHOLDER SERVICING AGENT
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110 is the custodian and dividend disbursing agent for the
Trust. MFS Service Center, Inc., 2 Avenue de Lafayette, Boston, Massachusetts
02111-1738, is the shareholder servicing agent.
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP are the Trust's independent public accountants and
certify financial statements of the Trust as required to be certified by any law
or regulation and provide certain other tax-related services for the Trust (such
as tax return preparation and assistance and consultation with respect to the
preparation of filings with the SEC). The principal business address of Deloitte
& Touche LLP is 200 Berkeley Street, Boston, Massachusetts 02116. The financial
statements included in this SAI have been so included, and the financial
highlights included in the Prospectus have been so included, in reliance upon
the report of Deloitte & Touche LLP given on the authority of said firm as
experts in accounting and auditing.
GLOSSARY
""AA" Composite Commercial Paper Rate" has the meaning set forth on page 13
of this Statement of Additional Information.
"Adviser" means Massachusetts Financial Services Company.
"Affected Series" has the meaning set forth on page 25 of this Statement of
Additional Information.
"Affiliate" means, for purposes of the definition of "Outstanding," any
Person known to the Auction Agent to be controlled by, in control of or under
common control with the Trust; provided, however, that no Broker-Dealer
controlled by, in control of or under common control with the Trust shall be
deemed to be an Affiliate nor shall any corporation or any Person controlled by,
in control of or under common control with such corporation, one of the
directors, trustees or executive officers of which is a trustee of the Trust be
deemed to be an Affiliate solely because such director, trustee or executive
officer is also a trustee of the Trust.
"Agent Member" means a member of or participant in the Securities Depository
that will act on behalf of a Bidder.
"Anticipation Notes" means Tax Anticipation Notes (TANs), Revenue
Anticipation Notes (RANs), Tax and Revenue Anticipation Notes (TRANs), Grant
Anticipation Notes (GANs) that are rated by Standard & Poor's and Bond
Anticipation Notes (BANs).
"Applicable Rate" has the meaning set forth on page 9 of this Statement of
Additional Information.
"Auction" means each periodic implementation of the Auction Procedures.
"Auction Agency Agreement" has the meaning set forth on page 10 of this
Statement of Additional Information.
"Auction Agent" means the entity appointed as such by a resolution of the
Board of Trustees.
"Auction Date," with respect to any Rate Period, means the Business Day next
preceding the first day of such Rate Period.
"Auction Procedures" means the procedures for conducting Auctions as
described in this Statement of Additional Information, including Appendix C
hereto.
"Available Municipal Preferred" has the meaning set forth on page 16 of this
Statement of Additional Information.
"Benchmark Rate" has the meaning set forth on page 16 of this Statement of
Additional Information.
"Beneficial Owner" has the meaning set forth on page 9 of this Statement
of Additional Information.
"Bid" has the meaning set forth on page 11 of this Statement of Additional
Information.
"Bidder" and "Bidders" have the respective meanings set forth on page 11 of
this Statement of Additional Information.
"Board of Trustees" or "Board" means the Board of Trustees of the Trust or
any duly authorized committee thereof.
"Broker-Dealer" means any broker-dealer, commercial bank or other entity
permitted by law to perform the functions required of a Broker-Dealer, that is a
member of, or a participant in, the Securities Depository or is an affiliate of
such member or participant, has been selected by the Trust and has entered into
a Broker-Dealer Agreement that remains effective.
"Broker-Dealer Agreement" means an agreement between the Auction Agent and a
Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the
procedures specified in the Statement, the Prospectus and this Statement of
Additional Information.
"Business Day" has the meaning set forth on page 9 of this Statement of
Additional Information.
"By-Laws" means the Amended and Restated By-Laws of MFS Municipal Income
Trust, as may be further amended from time to time.
"Cede" means Cede & Co., the nominee of DTC in whose name the shares of
Municipal Preferred initially will be registered.
"CFTC" means Commodity Futures Trading Commission.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" has the meaning set forth on page 13 of this
Statement of Additional Information.
"Common Shares" means the common shares of beneficial interest, without par
value, of the Trust.
"Cure Date" means the Municipal Preferred Basic Maintenance Cure Date or the
1940 Act Cure Date, as the case may be.
"Date of Original Issue" has the meaning set forth on page 9 of this
Statement of Additional Information.
"Declaration" means the Amended and Restated Declaration of Trust dated
November 6, 2000 of the Trust, on file with the Secretary of The Commonwealth of
Massachusetts and as hereafter restated or amended from time to time.
"Deposit Securities" means cash and Municipal Obligations rated at least
A-1+ or SP-1+ by Standard & Poor's, except that, for purposes of determining
whether the Trust may mail a Notice of Redemption, such Municipal Obligations
shall be considered "Deposit Securities" only if they are also rated P-1, MIG-1
or VMIG-1 by Moody's.
"Discount Factor" means a Moody's Discount Factor or a Standard & Poor's
Discount Factor, as the case may be.
"Discounted Value" means, as of any Valuation Date, (i) with respect to a
Standard & Poor's Eligible Asset, the quotient of the Market Value thereof
divided by the applicable Standard & Poor's Discount Factor and (ii)(a) with
respect to a Moody's Eligible Asset that is not currently callable as of such
Valuation Date at the option of the issuer thereof, the quotient of the Market
Value thereof divided by the applicable Moody's Discount Factor, or (b) with
respect to a Moody's Eligible Asset that is currently callable as of such
Valuation Date at the option of the issuer thereof, the quotient of (1) the
lesser of the Market Value or call price thereof, including any call premium,
divided by (2) the applicable Moody's Discount Factor.
"Dividend Payment Date" has the meaning set forth on page 9 of this
Statement of Additional Information.
"Dividend Period" has the meaning set forth on page 9 of this Statement of
Additional Information.
"DTC" has the meaning set forth on page 10 of this Statement of Additional
Information.
"Eligible Assets" means Moody's Eligible Assets or Standard & Poor's
Eligible Assets, as the case may be.
"Escrowed Bonds" means Municipal Obligations that (i) have been determined
to be legally defeased in accordance with Standard & Poor's/Moody's legal
defeasance criteria, (ii) have been determined to be economically defeased in
accordance with Standard & Poor's economic defeasance criteria and assigned a
rating of AAA by Standard & Poor's and a rating of Aaa by Moody's, (iii) are not
rated by Standard & Poor's but have been determined to be legally defeased by
Moody's or not rated by Moody's but have been determined to be legally defeased
by Standard & Poor's, or (iv) have been determined to be economically defeased
by Moody's and assigned a rating no lower than the rating that is Moody's
equivalent of Standard & Poor's AAA rating or have been determined to be
economically defeased by Standard & Poor's and assigned a rating no lower than
the rating that is Standard & Poor's equivalent of Moody's Aaa rating.
"Exchange" has the meaning set forth on page 9 of this Statement of
Additional Information.
"Existing Holder" has the meaning set forth on page 9 of this Statement of
Additional Information.
"Failure to Deposit," with respect to shares of Municipal Preferred, means a
failure by the Trust to pay to the Auction Agent, not later than 12:00 noon, New
York City time, (A) on any Dividend Payment Date for such shares, in funds
available on such Dividend Payment Date in The City of New York, New York, the
full amount of any dividend (whether or not earned or declared) to be paid on
such Dividend Payment Date on any share or (B) on any redemption date in funds
available on such redemption date for such shares in The City of New York, New
York, the Redemption Price to be paid on such redemption date for any share
after notice of redemption is mailed as set forth in the Statement, the
Prospectus or this Statement of Additional Information; provided, however, that
the foregoing clause (B) shall not apply to the Trust's failure to pay the
Redemption Price in respect of shares of Municipal Preferred when the related
Notice of Redemption provides that redemption of such shares is subject to one
or more conditions precedent and any such condition precedent shall not have
been satisfied at the time or times and in the manner specified in such Notice
of Redemption.
"Gross-up Payment" has the meaning set forth on page 22 of this Statement of
Additional Information.
"Hold Order" has the meaning set forth on page 11 of this Statement of
Additional Information.
"Holder" means the registered holder of shares of Municipal Preferred as the
same appears on the record books of the Trust.
"Initial Margin" means the amount of cash or securities deposited with a
broker as a margin payment at the time of purchase or sale of a futures
contract.
"Initial Rate Period" has the meaning set forth on page 9 of this Statement
of Additional Information.
"IRS" means the Internal Revenue Service.
"Inverse Floater" shall mean trust certificates or other instruments
evidencing interests in one or more municipal securities that qualify as
Standard & Poor's Eligible Assets and Moody's Eligible Assets (and satisfy the
issuer and size requirements of the definition of Standard & Poor's Eligible
Assets and Moody's Eligible Assets) the interest rates on which are adjusted at
short-term intervals on a basis that is inverse to the simultaneous readjustment
of the interest rates on corresponding floating rate trust certificates or other
instruments issued by the same issuer, provided that the ratio of the aggregate
dollar amount of floating rate instruments to inverse floating rate instruments
issued by the same issuer does not exceed one to one at their time or original
issuance unless the floating rate instrument has only one reset remaining until
maturity.
"Kenny Index" has the meaning set forth on page 13 of this Statement of
Additional Information.
"Liquidation Preference," with respect to a given number of shares of
Municipal Preferred, means $25,000 times that number.
"Market Value" of any asset of the Trust means the market value thereof
determined by the Pricing Services. Market Value of any asset shall include any
interest accrued thereon. The Pricing Services will use current industry
standards to value portfolio securities. The Pricing Services may employ
electronic data processing techniques or a matrix system, or both, to determine
valuations. Futures contracts and options shall be valued at closing prices for
such instruments established by the exchange or board of trade on which they are
traded. Securities for which quotations are not readily available ("Internally
Priced Securities") shall be valued at fair value on a consistent basis using
methods determined in good faith by the Board of Trustees.
"Maximum Potential Gross-up Payment Liability" has the meaning set forth on
page 28 of this Statement of Additional Information.
"Maximum Rate" has the meaning set forth on page 12 of this Statement of
Additional Information.
"Minimum Rate Period" means any Rate Period consisting of 7 Rate Period
Days.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Moody's Discount Factors" has the meaning set forth on page 30 of this
Statement of Additional Information.
"Moody's Eligible Assets" means trade date cash, futures, options, U.S.
Government Securities (which are valued for the purposes of meeting the
Municipal Preferred Basic Maintenance Amount without application of any discount
factor), inverse floaters that are one time levered and are rated at least Aa by
Moody's or AAA by Standard & Poor's if not rated by Moody's, and similar
instruments or a Municipal Obligation that (i) pays interest in cash, (ii) does
not have its Moody's rating, if applicable, suspended by Moody's, (iii) is part
of an issue of Municipal Obligations of at least $10,000,000 (excluding Escrowed
Bonds that are legally defeased), and (iv) is not subject to a covered call or a
covered put option written by the Trust. These eligible assets are valued or
accounted for on a trade date basis assuming normal settlement for the Municipal
Market. Municipal Obligations issued by any one issuer (excluding escrowed
bonds) and not rated by Moody's or rated lower than Baa3 by Moody's and not
rated by Standard & Poor's or rated lower than BBB by Standard & Poor's
("Unrated Moody's Municipal Obligations"), together with any Municipal
Obligations issued by the same issuer and rated BBB by Standard & Poor's may
comprise no more than 4% of total Moody's Eligible Assets; such BBB-rated
Municipal Obligations and Unrated Moody's Municipal Obligations, if any,
together with any Municipal Obligations issued by the same issuer and rated Baa
by Moody's or A by Standard & Poor's may comprise no more than 6% of total
Moody's Eligible Assets; such BBB, Baa and A rated Municipal Obligations and
Unrated Moody's Municipal Obligations, if any, together with any Municipal
Obligations issued by the same issuer and rated A by Moody's or AA by Standard &
Poor's, may comprise no more than 10% of total Moody's Eligible Assets; and such
BBB, Baa, A and AA-rated Municipal Obligations and Unrated Moody's Municipal
Obligations, if any, together with any Municipal Obligations issued by the same
issuer and rated Aa by Moody's or AAA by Standard & Poor's, may comprise no more
than 20% of total Moody's Eligible Assets. For purposes of the foregoing
sentence, any Municipal Obligation backed by the guaranty, letter of credit or
insurance issued by a third party shall be deemed to be issued by such third
party if the issuance of such third-party credit is the sole determinant of the
rating on such Municipal Obligations. Municipal Obligations issued by issuers
located within a single state or territory (excluding escrowed bonds) and not
rated by Moody's or rated lower than Baa3 by Moody's and not rated by Standard &
Poor's or rated lower than BBB by Standard & Poor's, together with any Municipal
Obligations issued by issuers located within the same state or territory and
rated BBB by Standard & Poor's may comprise no more than 12% of total Moody's
Eligible Assets; such BBB-rated Municipal Obligations and Unrated Moody's
Municipal Obligations, if any, together with any Municipal Obligations issued by
issuers located within the same state or territory and rated Baa by Moody's or A
by Standard & Poor's, may comprise no more than 20% of total Moody's Eligible
Assets; such BBB, Baa and A-rated Municipal Obligations and Unrated Moody's
Municipal Obligations, if any, together with any Municipal Obligations issued by
issuers located within the same state or territory and rated A by Moody's or AA
by Standard & Poor's, may comprise no more than 40% of total Moody's Eligible
Assets; and such BBB, Baa, A and AA-rated Municipal Obligations and Unrated
Moody's Municipal Obligations, if any, together with any Municipal Obligations
issued by issuers located within the same state or territory and rated Aa by
Moody's or AAA by Standard & Poor's, may comprise no more than 60% of total
Moody's Eligible Assets. Inverse Floaters may comprise no more than 10% of the
aggregate Market Value of Moody's Eligible Assets, provided however, that if the
Market Value of Inverse Floaters exceeds 10% of the aggregate Market Value of
Moody's Eligible Assets, a portion of such Inverse Floaters (selected by the
Trust) shall not be considered Moody's Eligible Assets so that the Market Value
of such Inverse Floaters (excluding such portion) does not exceed 10% of the
aggregate Market Value of Moody's Eligible Assets. Municipal Obligations which
are not rated by Moody's or Standard & Poor's may comprise no more than 40% of
the aggregate Market Value of Moody's Eligible Assets; provided, however, that
if the Market Value of such Municipal Obligations exceeds 40% of the aggregate
Market Value of Moody's Eligible Assets, a portion of such Municipal Obligations
(selected by the Trust) shall not be considered Moody's Eligible Assets, so that
the Market Value of such Municipal Obligations (excluding such portion) does not
exceed 40% of the aggregate Market Value of Moody's Eligible Assets; provided,
however, that no such unrated Municipal Obligation shall be considered a Moody's
Eligible Asset if such Municipal Obligation shall be in "default", which term
shall mean for purposes of this definition, either (a) the nonpayment by the
issuer of interest or principal when due or (b) the notification of the Trust by
the trustee under the underlying indenture or other governing instrument for
such Municipal Obligation that the issuer will fail to pay when due principal or
interest on such Municipal Obligation. For purposes of applying the foregoing
requirements, a Municipal Obligation shall be deemed to be rated BBB by Standard
& Poor's if rated BBB-, BBB or BBB+ by Standard & Poor's, and Municipal
Obligations rated MIG-1, VMIG-1 or P-1 or, if not rated by Moody's, rated
A-1+/AA or SP-1+/AA by Standard & Poor's, shall be considered to have a
long-term rating of A. When the Trust sells a Municipal Obligation and agrees to
repurchase such Municipal Obligation at a future day, such Municipal Obligation
shall be valued at its Discounted Value for purposes of determining Moody's
Eligible Assets, and the amount of the repurchase price of such Municipal
Obligation shall be included as a liability for purposes of calculating the
Municipal Preferred Basic Maintenance Amount. When the Trust purchases a Moody's
Eligible Asset and agrees to sell it at a future date, such Eligible Asset shall
be valued at the amount of cash to be received by the Trust upon such future
date, provided that the counterparty to the transaction has a long-term debt
rating of at least A2 and a short-term debt rating of at least P1 from Moody's
and the transaction has a term of no more than 30 days; otherwise such Eligible
Asset shall be valued at the Discounted Value of such Eligible Asset. For
purposes of determining the aggregate Discounted Value of Moody's Eligible
Assets, such aggregate amount shall be reduced with respect to any futures
contracts as set forth in paragraph 10(a) of the Statement.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset to the extent it is (i) subject to any material lien, mortgage,
pledge, security interest or security agreement of any kind (collectively,
"Liens"), except for (a) Liens which are being contested in good faith by
appropriate proceedings and which Moody's has indicated to the Trust will not
affect the status of such asset as a Moody's Eligible Asset, (b) Liens for taxes
that are not then due and payable or that can be paid thereafter without
penalty, (c) Liens to secure payment for services rendered or cash advanced to
the Trust by Massachusetts Financial Services Company, State Street Bank and
Trust Company or the Auction Agent and (d) Liens by virtue of any repurchase
agreement or futures contract; or (ii) deposited irrevocably for the payment of
any liabilities for purposes of determine the Municipal Preferred Basic
Maintenance Amount. In addition, an asset will not be considered a Moody's
Eligible Asset if it is an Internally Priced Security (as defined under "Market
Value").
"Moody's Exposure Period" has the meaning set forth on page 30 of this
Statement of Additional Information.
"Moody's Volatility Factor" means, as of any Valuation Date, (i) in the case
of any Minimum Rate Period, any Special Rate Period of 28 Rate Period Days or
fewer, or any Special Rate Period of 57 Rate Period Days or more, a
multiplicative factor equal to 275%, except as otherwise provided in the last
sentence of this definition; (ii) in the case of any Special Rate Period of more
than 28 but fewer than 36 Rate Period Days, a multiplicative factor equal to
203%; (iii) in the case of any Special Rate Period of more than 35 but fewer
than 43 Rate Period Days, a multiplicative factor equal to 217%; (iv) in the
case of any Special Rate Period of more than 42 but fewer than 50 Rate Period
Days, a multiplicative factor equal to 226%; and (v) in the case of any Special
Rate Period of more than 49 but fewer than 57 Rate Period Days, a multiplicative
factor equal to 235%. If, as a result of the enactment of changes to the Code,
the greater of the maximum marginal Federal individual income tax rate
applicable to ordinary income and the maximum marginal Federal corporate income
tax rate applicable to ordinary income will increase, such increase being
rounded up to the next five percentage points, until the effective date of such
increase, the Moody's Volatility Factor in the case of any Rate Period described
in (i) above in this definition instead shall be determined by reference to the
following table:
FEDERAL VOLATILITY
TAX RATE INCREASE FACTOR
----------------- ------
5% 295%
10% 317%
15% 341%
20% 369%
25% 400%
30% 436%
35% 477%
40% 525%
"Municipal Preferred" means the Municipal Auction Rate Cumulative Preferred
Shares, Series T and/or Series TH without par value, liquidation preference
$25,000 per share, of the Trust.
"Municipal Preferred Basic Maintenance Amount" has the meaning set forth on
page 27 of this Statement of Additional Information.
"Municipal Preferred Basic Maintenance Cure Date" has the meaning set forth
on page 27 of this Statement of Additional Information.
"Municipal Preferred Basic Maintenance Report" has the meaning set forth on
page 28 of this Statement of Additional Information.
"1940 Act" means the Investment Company Act of 1940, as amended.
"1940 Act Cure Date" has the meaning set forth on page 27 of this Statement
of Additional Information.
"1940 Act Municipal Preferred Asset Coverage" has the meaning set forth on
page 27 of this Statement of Additional Information.
"Notice of Redemption" has the meaning set forth on page 33 of this
Statement of Additional Information.
"Notice of Special Rate Period" has the meaning set forth on page 24 of this
Statement of Additional Information.
"Order" and "Orders" have the respective meanings set forth on page 11 of
this Statement of Additional Information.
"Outstanding" means, as of any Auction Date with respect to shares of
Municipal Preferred, the number of such shares theretofore issued by the Trust
except, without duplication, (i) any shares of Municipal Preferred theretofore
canceled or delivered to the Auction Agent for cancellation or redeemed by the
Trust, (ii) any shares of Municipal Preferred as to which the Trust or any
Affiliate thereof shall be an Existing Holder, and (iii) any shares of Municipal
Preferred represented by any certificate in lieu of which a new certificate has
been executed and delivered by the Trust.
"Person" means and includes an individual, a partnership, a corporation, a
trust, an unincorporated association, a joint venture or other entity or a
government or any agency or political subdivision thereof.
"Potential Beneficial Owner" has the meaning set forth on page 9 of this
Statement of Additional Information.
"Potential Holder" has the meaning set forth on page 9 of this Statement of
Additional Information.
"Preferred Shares" means the preferred shares of beneficial interest,
without par value of the Trust, and includes the Municipal Preferred.
"Pricing Services" shall mean those pricing services which are both
designated from time to time by the Board of Trustees and approved from time to
time for use by Standard & Poor's (the pricing services approved for use by
Standard & Poor's as of the date of this Statement of Additional Information are
Bloomberg, Bridge Information Services, Interactive Data Corporation, Merrill
Lynch Securities Pricing Service, Standard and Poor's, JJ Kenny (Municipal
securities only) and CIBC Wood Gundy (Canadian government and provincial
securities only)).
"Rate Multiple" has the meaning set forth on page 14 of this Statement of
Additional Information.
"Rate Period" has the meaning set forth on page 9 of this Statement of
Additional Information.
"Rate Period Days," for any Rate Period or Dividend Period, means the number
of days that would constitute such Rate Period or Dividend Period but for the
application of the second paragraph under "Description of Municipal Preferred --
Dividends -- General" or the second paragraph under "Description of Municipal
Preferred -- Dividends -- Designation of Special Rate Periods."
"Redemption Price" has the meaning set forth on page 32 of this Statement of
Additional Information.
"Reference Rate" has the meaning set forth on page 12 of this Statement of
Additional Information.
"SEC" means the Securities and Exchange Commission.
"Securities Depository" means The Depository Trust Company and its
successors and assigns or any other securities depository selected by the Trust
which agrees to follow the procedures required to be followed by such securities
depository in connection with shares of Municipal Preferred.
"Sell Order" has the meaning set forth on page 11 of this Statement of
Additional Information.
"Special Rate Period" has the meaning set forth on page 9 of this Statement
of Additional Information.
"Special Redemption Provisions" has the meaning set forth on page 32 of this
Statement of Additional Information.
"Standard & Poor's" means Standard & Poor's Ratings Services, a division of
The McGraw-Hill Companies, and its successors.
"Standard & Poor's Discount Factors" has the meaning set forth on page 28 of
this Statement of Additional Information.
"Standard & Poor's Eligible Assets" means trade date cash (excluding any
cash irrevocably deposited by the Trust for the payment of any liabilities
within the meaning of Municipal Preferred Basic Maintenance Amount), futures,
options, Inverse Floaters, U.S. Government Securities (which are valued for the
purposes of meeting the Municipal Preferred Basic Maintenance Amount without
application of any discount factor) and similar instruments or a Municipal
Obligation owned by the Trust that (i) is interest bearing and pays interest at
least semi-annually (except as stated in number four (4) below); (ii) is payable
with respect to principal and interest in U.S. Dollars; (iii) in the case of
Anticipation Notes that are Grant Anticipation Notes or Bond Anticipation Notes,
be rated by Standard & Poor's; (iv) is not part of a private placement of
Municipal Obligations (except in the case of Inverse Floaters); (v) is part of
an issue of Municipal Obligations (excluding Escrowed Bonds that are legally
defeased) with an original issue size of at least $20 million or, if of an issue
with an original issue size below $20 million (but in no event below $10
million), is issued by an issuer with a total of at least $50 million of
securities outstanding; and (vi) is not subject to a covered call or covered put
option written by the Trust. These eligible assets are valued or accounted for
on a trade date basis assuming normal settlement for the Municipal Market.
Standard & Poor's Eligible Assets shall not include Internally Priced Securities
(as defined under "Market Value"). Solely for purposes of this definition, the
term "Municipal Obligation" means any obligation the interest on which is exempt
from regular Federal income taxation and which is issued by any of the fifty
United States, the District of Columbia or any of the territories of the United
States, their subdivisions, counties, cities, towns, villages, school districts
and agencies (including authorities and special districts created by the
states), and federally sponsored agencies such as local housing authorities.
Notwithstanding the foregoing limitations:
(1) Municipal Obligations (excluding Escrowed Bonds) of any one issuer
or guarantor (excluding bond insurers) shall be considered Standard & Poor's
Eligible Assets only to the extent the Market Value of such Municipal
Obligations does not exceed 10% of the aggregate Market Value of Standard &
Poor's Eligible Assets, provided that 2% is added to the applicable Standard
& Poor's Discount Factor for every 1% by which the Market Value of such
Municipal Obligations exceeds 5% of the aggregate Market Value of Standard &
Poor's Eligible Assets, and provided that Municipal Obligations (excluding
Escrowed Bonds) not rated by Standard & Poor's or rated less than BBB by
Standard & Poor's and not rated at least A by another nationally recognized
credit rating agency of any one issuer or guarantor (excluding bond
insurers) shall constitute Standard & Poor's Eligible Assets only to the
extent the Market Value of such Municipal Obligations does not exceed 5% of
the aggregate Market Value of Standard & Poor's Eligible Assets;
(2) Municipal Obligations not rated at least BBB or not rated by
Standard & Poor's and not rated at least A by another nationally recognized
credit rating agency shall be considered Standard & Poor's Eligible Assets
only to the extent the Market Value of such Municipal Obligations does not
exceed 50% of the aggregate Market Value of Standard & Poor's Eligible
Assets; provided, however, that if the Market Value of such Municipal
Obligations exceeds 50% of the aggregate Market Value of Standard & Poor's
Eligible Assets, a portion of such Municipal Obligations (selected by the
Trust) shall not be considered Standard & Poor's Eligible Assets, so that
the Market Value of such Municipal Obligations (excluding such portion) does
not exceed 50% of the aggregate Market Value of Standard & Poor's Eligible
Assets;
(3) Long-term Municipal Obligations (excluding Escrowed Bonds) issued by
issuers in any one state or territory shall be considered Standard & Poor's
Eligible Assets only to the extent that the Market Value of such Municipal
Obligations does not exceed 25% of the aggregate Market Value of Standard &
Poor's Eligible Assets; and
(4) Municipal Obligations which are not interest bearing or do not pay
interest at least semi-annually shall be considered Standard & Poor's
Eligible Assets if rated AAA by Standard & Poor's.
For purposes of determining the aggregate Discounted Value of Standard &
Poor's Eligible Assets, such aggregate amount shall be reduced with respect to
any futures contracts as set forth in paragraph 10(a) of the Statement.
"Standard & Poor's Exposure Period" has the meaning set forth on pages 28-29
of this Statement of Additional Information.
"Standard & Poor's Volatility Factor" means, as of any Valuation Date, a
multiplicative factor equal to (i) 305% in the case of any Minimum Rate Period
or any Special Rate Period of 28 Rate Period Days or fewer, (ii) 268% in the
case of any Special Rate Period of more than 28 Rate Period Days but fewer than
183 Rate Period Days, and (iii) 204% in the case of any Special Rate Period of
more than 182 Rate Period Days.
"Statement" means the Statement creating the Municipal Preferred shares.
"Submission Deadline" means 1:30 P.M., New York City time, on any Auction
Date or such other time on any Auction Date by which Broker-Dealers are required
to submit Orders to the Auction Agent as specified by the Auction Agent from
time to time.
"Submitted Bid" and "Submitted Bids" have the respective meanings set forth
on page 16 of this Statement of Additional Information.
"Submitted Hold Order" and "Submitted Hold Orders" have the respective
meanings set forth on page 16 of this Statement of Additional Information.
"Submitted Order" and "Submitted Orders" have the respective meanings set
forth on page 16 of this Statement of Additional Information.
"Submitted Sell Order" and "Submitted Sell Orders" have the respective
meanings set forth on page 16 of this Statement of Additional Information.
"Subsequent Rate Period" has the meaning set forth on page 9 of this
Statement of Additional Information.
"Substitute Commercial Paper Dealer" has the meaning set forth on page 14 of
this Statement of Additional Information.
"Substitute U.S. Government Securities Dealer" has the meaning set forth on
page 14 of this Statement of Additional Information.
"Sufficient Clearing Bids" has the meaning set forth on page 16 of this
Statement of Additional Information.
"Taxable Allocation" has the meaning set forth on page 21 of this Statement
of Additional Information.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" has the meaning
set forth on page 13 of this Statement of Additional Information.
"Taxable Income" has the meaning set forth on page 16 of this Statement of
Additional Information.
"Taxable Yield Rate" has the meaning set forth on pages 16-17 of this
Statement of Additional Information.
"Treasury Bill" has the meaning set forth on page 14 of this Statement of
Additional Information.
"Treasury Bill Rate" has the meaning set forth on page 14 of this Statement
of Additional Information.
"Treasury Note" has the meaning set forth on page 14 of this Statement of
Additional Information.
"Treasury Note Rate" has the meaning set forth on page 14 of this Statement
of Additional Information.
"Trust" means MFS Municipal Income Trust, a Massachusetts business trust,
which is the issuer of the shares of Municipal Preferred.
"U.S. Government Securities Dealer" has the meaning set forth on page 14 of
this Statement of Additional Information.
"Valuation Date" has the meaning set forth on page 27 of this Statement of
Additional Information.
"Variation Margin" means, in connection with an outstanding futures contract
owned or sold by the Trust, the amount of cash or securities paid to or received
from a broker (subsequent to the Initial Margin payment) from time to time as
the price of such futures contract fluctuates.
"Volatility Factor" means, as of any Valuation Date, the greater of the
Moody's Volatility Factor and the Standard & Poor's Volatility Factor.
"Voting Period" means a period that shall commence (A) if at the close of
business on any dividend payment date accumulated dividends (whether or not
earned or declared) on any outstanding Preferred Share, including Municipal
Preferred, equal to at least two full years' dividends shall be due and unpaid
and sufficient cash or specified securities shall not have been deposited with
the Auction Agent for the payment of such accumulated dividends; or (B) if at
any time holders of Preferred Shares are entitled under the 1940 Act to elect a
majority of the trustees of the Trust.
"Winning Bid Rate" has the meaning set forth on page 16 of this Statement of
Additional Information.
FINANCIAL STATEMENTS
The financial statements for the Trust contained in the Trust's Annual
Report to Shareholders, dated October 31, 1999 (audited) and Semi-Annual Report
to Shareholders, dated April 30, 2000 (unaudited), have been incorporated by
reference into this Statement of Additional Information. The financial
statements contained in the Trust's Annual Report to Shareholders, dated October
31, 1999, and notes thereto have been so incorporated in reliance upon the
reports of Deloitte & Touche LLP, the Trust's independent accountants.
<PAGE>
APPENDIX A
DESCRIPTION OF INVESTMENTS
Set forth below is a description of investment techniques and practices which
the Trust may generally use in pursuing its investment objective and principal
investment policies, and the risks associated with these investment techniques
and practices.
DEBT SECURITIES
To the extent the Trust invests in the following types of debt securities, its
net asset value may change as the general levels of interest rates fluctuate.
When interest rates decline, the value of debt securities can be expected to
rise. Conversely, when interest rates rise, the value of debt securities can be
expected to decline. The Trust's investment in debt securities with longer terms
to maturity are subject to greater volatility than the Trust's shorter-term
obligations. Debt securities may have all types of interest rate payment and
reset terms, including fixed rate, adjustable rate, zero coupon, contingent,
deferred, payment in kind and auction rate features.
ASSET-BACKED SECURITIES: The Trust may purchase the following types of
asset-backed securities:
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES:
The Trust may invest a portion of its assets in collateralized mortgage
obligations or "CMOs," which are debt obligations collateralized by mortgage
loans or mortgage pass-through securities (such collateral referred to
collectively as "Mortgage Assets"). Unless the context indicates otherwise, all
references herein to CMOs include multiclass pass-through securities.
Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the Mortgage
Assets may be allocated among the several classes of a CMO in innumerable ways.
In a common structure, payments of principal, including any principal
prepayments, on the Mortgage Assets are applied to the classes of a CMO in the
order of their respective stated maturities or final distribution dates, so that
no payment of principal will be made on any class of CMOs until all other
classes having an earlier stated maturity or final distribution date have been
paid in full. Certain CMOs may be stripped (securities which provide only the
principal or interest factor of the underlying security). See "Stripped
Mortgage-Backed Securities" below for a discussion of the risks of investing in
these stripped securities and of investing in classes consisting of interest
payments or principal payments.
The Trust may also invest in parallel pay CMOs and Planned Amortization
Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments
of principal on each payment date to more than one class. These simultaneous
payments are taken into account in calculating the stated maturity date or final
distribution date of each class, which, as with other CMO structures, must be
retired by its stated maturity date or final distribution date but may be
retired earlier.
CORPORATE ASSET-BACKED SECURITIES: The Trust may invest in corporate
asset-backed securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card and automobile
loan receivables, representing the obligations of a number of different parties.
These securities present certain risks. For instance, in the case of credit card
receivables, these securities may not have the benefit of any security interest
in the related collateral. Credit card receivables are generally unsecured and
the debtors are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance due. Most
issuers of automobile receivables permit the servicers to retain possession of
the underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related automobile receivables. In
addition, because of the large number of vehicles involved in a typical issuance
and technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have a proper security interest in all of the
obligations backing such receivables. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities. The underlying assets (e.g., loans) are
also subject to prepayments which shorten the securities' weighted average life
and may lower their return.
Corporate asset-backed securities are backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. The
Trust will not pay any additional or separate fees for credit support. The
degree of credit support provided for each issue is generally based on
historical information respecting the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that anticipated or failure
of the credit support could adversely affect the return on an investment in such
a security.
MORTGAGE PASS-THROUGH SECURITIES: The Trust may invest in mortgage
pass-through securities. Mortgage pass-through securities are securities
representing interests in "pools" of mortgage loans. Monthly payments of
interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issuer or
guarantor of the securities) as the mortgages in the underlying mortgage pools
are paid off. The average lives of mortgage pass-throughs are variable when
issued because their average lives depend on prepayment rates. The average life
of these securities is likely to be substantially shorter than their stated
final maturity as a result of unscheduled principal prepayment. Prepayments on
underlying mortgages result in a loss of anticipated interest, and all or part
of a premium if any has been paid, and the actual yield (or total return) to the
Trust may be different than the quoted yield on the securities. Mortgage
premiums generally increase with falling interest rates and decrease with rising
interest rates. Like other fixed income securities, when interest rates rise the
value of a mortgage pass-through security generally will decline; however, when
interest rates are declining, the value of mortgage pass-through securities with
prepayment features may not increase as much as that of other fixed-income
securities. In the event of an increase in interest rates which results in a
decline in mortgage prepayments, the anticipated maturity of mortgage
pass-through securities held by the Trust may increase, effectively changing a
security which was considered short or intermediate-term at the time of purchase
into a long-term security. Long-term securities generally fluctuate more widely
in response to changes in interest rates than short or intermediate-term
securities.
Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by the
full faith and credit of the U.S. Government (in the case of securities
guaranteed by the Government National Mortgage Association ("GNMA")); or
guaranteed by agencies or instrumentalities of the U.S. Government (such as the
Federal National Mortgage Association "FNMA") or the Federal Home Loan Mortgage
Corporation, ("FHLMC") which are supported only by the discretionary authority
of the U.S. Government to purchase the agency's obligations). Mortgage
pass-through securities may also be issued by non-governmental issuers (such as
commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers). Some of these
mortgage pass-through securities may be supported by various forms of insurance
or guarantees.
Interests in pools of mortgage-related securities differ from other forms of
debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a monthly payment which consists of both
interest and principal payments. In effect, these payments are a "pass-through"
of the monthly payments made by the individual borrowers on their mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Additional payments are caused by prepayments of principal resulting from the
sale, refinancing or foreclosure of the underlying property, net of fees or
costs which may be incurred. Some mortgage pass-through securities (such as
securities issued by the GNMA) are described as "modified pass-through." These
securities entitle the holder to receive all interests and principal payments
owed on the mortgages in the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether the mortgagor actually makes the
payment.
The principal governmental guarantor of mortgage pass-through securities is
GNMA. GNMA is a wholly owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks and mortgage bankers) and backed by
pools of Federal Housing Administration ("FHA") insured or Veterans
Administration ("VA") guaranteed mortgages. These guarantees, however, do not
apply to the market value or yield of mortgage pass-through securities. GNMA
securities are often purchased at a premium over the maturity value of the
underlying mortgages. This premium is not guaranteed and will be lost if
prepayment occurs.
Government-related guarantors (i.e., whose guarantees are not backed by the
full faith and credit of the U.S. Government) include FNMA and FHLMC. FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional residential mortgages (i.e., mortgages not insured
or guaranteed by any governmental agency) from a list of approved
seller/servicers which include state and federally chartered savings and loan
associations, mutual savings banks, commercial banks, credit unions and mortgage
bankers. Pass-through securities issued by FNMA are guaranteed as to timely
payment by FNMA of principal and interest.
FHLMC is also a government-sponsored corporation owned by private
stockholders. FHLMC issues Participation Certificates ("PCs") which represent
interests in conventional mortgages (i.e., not federally insured or guaranteed)
for FHLMC's national portfolio. FHLMC guarantees timely payment of interest and
ultimate collection of principal regardless of the status of the underlying
mortgage loans.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create pass
through pools of mortgage loans. Such issuers may also be the originators and/or
servicers of the underlying mortgage-related securities. Pools created by such
non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments in the former pools. However, timely
payment of interest and principal of mortgage loans in these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. The Trust may also buy mortgage-related securities without
insurance or guarantees.
STRIPPED MORTGAGE-BACKED SECURITIES: The Trust may invest a portion of its
assets in stripped mortgage-backed securities ("SMBS") which are derivative
multiclass mortgage securities issued by agencies or instrumentalities of the
U.S. Government, or by private originators of, or investors in, mortgage loans,
including savings and loan institutions, mortgage banks, commercial banks and
investment banks.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the Mortgage Assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the interest-only or
"IO class) while the other class will receive all of the principal (the
principal-only or "PO class). The yield to maturity on an IO is extremely
sensitive to the rate of principal payments, including prepayments on the
related underlying Mortgage Assets, and a rapid rate of principal payments may
have a material adverse effect on such security's yield to maturity. If the
underlying Mortgage Assets experience greater than anticipated prepayments of
principal, the Trust may fail to fully recoup its initial investment in these
securities. The market value of the class consisting primarily or entirely of
principal payments generally is unusually volatile in response to changes in
interest rates. Because SMBS were only recently introduced, established trading
markets for these securities have not yet developed, although the securities are
traded among institutional investors and investment banking firms.
CORPORATE SECURITIES: The Trust may invest in debt securities, such as
convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Trust may purchase loans and other
direct indebtedness. In purchasing a loan, the Trust acquires some or all of the
interest of a bank or other lending institution in a loan to a corporate,
governmental or other borrower. Many such loans are secured, although some may
be unsecured. Such loans may be in default at the time of purchase. Loans that
are fully secured offer the Trust more protection than an unsecured loan in the
event of non-payment of scheduled interest or principal. However, there is no
assurance that the liquidation of collateral from a secured loan would satisfy
the corporate borrowers obligation, or that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has negotiated
and structured the loan and is responsible for collecting interest, principal
and other amounts due on its own behalf and on behalf of the others in the
syndicate, and for enforcing its and their other rights against the borrower.
Alternatively, such loans may be structured as a novation, pursuant to which the
Trust would assume all of the rights of the lending institution in a loan or as
an assignment, pursuant to which the Trust would purchase an assignment of a
portion of a lenders interest in a loan either directly from the lender or
through an intermediary. The Trust may also purchase trade or other claims
against companies, which generally represent money owned by the company to a
supplier of goods or services. These claims may also be purchased at a time when
the company is in default.
Certain of the loans and the other direct indebtedness acquired by the Trust
may involve revolving credit facilities or other standby financing commitments
which obligate the Trust to pay additional cash on a certain date or on demand.
These commitments may have the effect of requiring the Trust to increase its
investment in a company at a time when the Trust might not otherwise decide to
do so (including at a time when the company's financial condition makes it
unlikely that such amounts will be repaid). To the extent that the Trust is
committed to advance additional funds, it will at all times hold and maintain in
a segregated account cash or other high grade debt obligations in an amount
sufficient to meet such commitments.
The Trust's ability to receive payment of principal, interest and other
amounts due in connection with these investments will depend primarily on the
financial condition of the borrower. In selecting the loans and other direct
indebtedness which the Trust will purchase, the Adviser will rely upon its own
(and not the original lending institution's) credit analysis of the borrower. As
the Trust may be required to rely upon another lending institution to collect
and pass onto the Trust amounts payable with respect to the loan and to enforce
the Trust's rights under the loan and other direct indebtedness, an insolvency,
bankruptcy or reorganization of the lending institution may delay or prevent the
Trust from receiving such amounts. In such cases, the Trust will evaluate as
well the creditworthiness of the lending institution and will treat both the
borrower and the lending institution as an "issuer" of the loan for purposes of
certain investment restrictions pertaining to the diversification of the Trust's
portfolio investments. The highly leveraged nature of many such loans and other
direct indebtedness may make such loans and other direct indebtedness especially
vulnerable to adverse changes in economic or market conditions. Investments in
such loans and other direct indebtedness may involve additional risk to the
Trust.
LOWER RATED BONDS: The Trust may invest in fixed income securities rated Ba
or lower by Moody's or BB or lower by S&P or Fitch IBCA, Duff & Phelps and
comparable unrated securities (commonly known as "junk bonds"). See Appendix D
for a description of bond ratings. No minimum rating standard is required by the
Trust. These securities are considered speculative and, while generally
providing greater income than investments in higher rated securities, will
involve greater risk of principal and income (including the possibility of
default or bankruptcy of the issuers of such securities) and may involve greater
volatility of price (especially during periods of economic uncertainty or
change) than securities in the higher rating categories and because yields vary
over time, no specific level of income can ever be assured. These lower rated
high yielding fixed income securities generally tend to reflect economic changes
(and the outlook for economic growth), short-term corporate and industry
developments and the market's perception of their credit quality (especially
during times of adverse publicity) to a greater extent than higher rated
securities which react primarily to fluctuations in the general level of
interest rates (although these lower rated fixed income securities are also
affected by changes in interest rates). In the past, economic downturns or an
increase in interest rates have, under certain circumstances, caused a higher
incidence of default by the issuers of these securities and may do so in the
future, especially in the case of highly leveraged issuers. The prices for these
securities may be affected by legislative and regulatory developments. The
market for these lower rated fixed income securities may be less liquid than the
market for investment grade fixed income securities. Furthermore, the liquidity
of these lower rated securities may be affected by the market's perception of
their credit quality. Therefore, the Adviser's judgment may at times play a
greater role in valuing these securities than in the case of investment grade
fixed income securities, and it also may be more difficult during times of
certain adverse market conditions to sell these lower rated securities to meet
redemption requests or to respond to changes in the market.
While the Adviser may refer to ratings issued by established credit rating
agencies, it is not the Trust's policy to rely exclusively on ratings issued by
these rating agencies, but rather to supplement such ratings with the Adviser's
own independent and ongoing review of credit quality. To the extent the Trust
invests in these lower rated securities, the achievement of its investment
objectives may be a more dependent on the Adviser's own credit analysis than in
the case of a fund investing in higher quality fixed income securities. These
lower rated securities may also include zero coupon bonds, deferred interest
bonds and PIK bonds.
MUNICIPAL BONDS: The Trust will invest in debt securities issued by or on
behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from federal income tax
("Municipal Bonds"). Municipal Bonds include debt securities which pay interest
income that is subject to the alternative minimum tax. The Trust may invest in
Municipal Bonds whose issuers pay interest on the Bonds from revenues from
projects such as multifamily housing, nursing homes, electric utility systems,
hospitals or life care facilities.
If a revenue bond is secured by payments generated from a project, and the
revenue bond is also secured by a lien on the real estate comprising the
project, foreclosure by the indenture trustee on the lien for the benefit of the
bondholders creates additional risks associated with owning real estate,
including environmental risks.
Housing revenue bonds typically are issued by a state, county or local
housing authority and are secured only by the revenues of mortgages originated
by the authority using the proceeds of the bond issue. Because of the
impossibility of precisely predicting demand for mortgages from the proceeds of
such an issue, there is a risk that the proceeds of the issue will be in excess
of demand, which would result in early retirement of the bonds by the issuer.
Moreover, such housing revenue bonds depend for their repayment upon the cash
flow from the underlying mortgages, which cannot be precisely predicted when the
bonds are issued. Any difference in the actual cash flow from such mortgages
from the assumed cash flow could have an adverse impact upon the ability of the
issuer to make scheduled payments of principal and interest on the bonds, or
could result in early retirement of the bonds. Additionally, such bonds depend
in part for scheduled payments of principal and interest upon reserve funds
established from the proceeds of the bonds, assuming certain rates of return on
investment of such reserve funds. If the assumed rates of return are not
realized because of changes in interest rate levels or for other reasons, the
actual cash flow for scheduled payments of principal and interest on the bonds
may be inadequate. The financing of multi-family housing projects is affected
by a variety of factors, including satisfactory completion of construction
within cost constraints, the achievement and maintenance of a sufficient level
of occupancy, sound management of the developments, timely and adequate
increases in rents to cover increases in operating expenses, including taxes,
utility rates and maintenance costs, changes in applicable laws and governmental
regulations and social and economic trends.
Electric utilities face problems in financing large construction programs in
inflationary periods, cost increases and delay occasioned by environmental
considerations (particularly with respect to nuclear facilities), difficulty in
obtaining fuel at reasonable prices, the cost of competing fuel sources,
difficulty in obtaining sufficient rate increases and other regulatory problems,
the effect of energy conservation and difficulty of the capital market to absorb
utility debt.
Health care facilities include life care facilities, nursing homes and
hospitals. Life care facilities are alternative forms of long-term housing for
the elderly which offer residents the independence of condominium life style
and, if needed, the comprehensive care of nursing home services. Bonds to
finance these facilities have been issued by various state industrial
development authorities. Since the bonds are secured only by the revenues of
each facility and not by state or local government tax payments, they are
subject to a wide variety of risks. Primarily, the projects must maintain
adequate occupancy levels to be able to provide revenues adequate to maintain
debt service payments. Moreover, in the case of life care facilities, since a
portion of housing, medical care and other services may be financed by an
initial deposit, there may be risk if the facility does not maintain adequate
financial reserves to secure estimated actuarial liabilities. The ability of
management to accurately forecast inflationary cost pressures weighs importantly
in this process. The facilities may also be affected by regulatory cost
restrictions applied to health care delivery in general, particularly state
regulations or changes in Medicare and Medicaid payments or qualifications, or
restrictions imposed by medical insurance companies. They may also face
competition from alternative health care or conventional housing facilities in
the private or public sector. Hospital bond ratings are often based on
feasibility studies which contain projections of expenses, revenues and
occupancy levels. A hospital's gross receipts and net income available to
service its debt are influenced by demand for hospital services, the ability of
the hospital to provide the services required, management capabilities, economic
developments in the service area, efforts by insurers and government agencies to
limit rates and expenses, confidence in the hospital, service area economic
developments, competition, availability and expense of malpractice insurance,
Medicaid and Medicare funding, and possible federal legislation limiting the
rates of increase of hospital charges.
The Trust may invest in municipal lease securities. These are undivided
interests in a portion of an obligation in the form of a lease or installment
purchase which is issued by state and local governments to acquire equipment and
facilities. Municipal leases frequently have special risks not normally
associated with general obligation or revenue bonds. Leases and installment
purchase or conditional sale contracts (which normally provide for title to the
leased asset to pass eventually to the governmental issuer) have evolved as a
means for governmental issuers to acquire property and equipment without meeting
the constitutional and statutory requirements for the issuance of debt. The
debt-issuance limitations are deemed to be inapplicable because of the inclusion
in many leases or contracts of "non-appropriation" clauses that provide that the
governmental issuer has no obligation to make future payments under the lease or
contract unless money is appropriated for such purpose by the appropriate
legislative body on a yearly or other periodic basis. Although the obligations
will be secured by the leased equipment or facilities, the disposition of the
property in the event of non-appropriation or foreclosure might, in some cases,
prove difficult. There are, of course, variations in the security of municipal
lease securities, both within a particular classification and between
classifications, depending on numerous factors.
The Trust may also invest in bonds for industrial and other projects, such
as sewage or solid waste disposal or hazardous waste treatment facilities.
Financing for such projects will be subject to inflation and other general
economic factors as well as construction risks including labor problems,
difficulties with construction sites and the ability of contractors to meet
specifications in a timely manner. Because some of the materials, processes and
wastes involved in these projects may include hazardous components, there are
risks associated with their production, handling and disposal.
SPECULATIVE BONDS: The Trust may invest in fixed income and convertible
securities rated Baa by Moody's or BBB by S&P or Fitch IBCA, Duff & Phelps and
comparable unrated securities. See Appendix D for a description of bond ratings.
These securities, while normally exhibiting adequate protection parameters, have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher grade securities.
U.S. GOVERNMENT SECURITIES: U.S. Government Securities are bonds or other
debt obligations issued by, or whose principal or interest payments are
guaranteed by, the U.S. Government or one of its agencies or instrumentalities.
U.S. Government Securities also include interests in trust or other entities
representing interests in obligations that are issued or guaranteed by the U.S.
Government, its agenices, authorities or instrumentalities.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: The Trust may
invest in zero coupon bonds, deferred interest bonds and bonds on which the
interest is payable in kind ("PIK bonds"). Zero coupon and deferred interest
bonds are debt obligations which are issued at a significant discount from face
value. The discount approximates the total amount of interest the bonds will
accrue and compound over the period until maturity or the first interest payment
date at a rate of interest reflecting the market rate of the security at the
time of issuance. While zero coupon bonds do not require the periodic payment of
interest, deferred interest bonds provide for a period of delay before the
regular payment of interest begins. PIK bonds are debt obligations which provide
that the issuer may, at its option, pay interest on such bonds in cash or in the
form of additional debt obligations. Such investments benefit the issuer by
mitigating its need for cash to meet debt service, but also require a higher
rate of return to attract investors who are willing to defer receipt of such
cash. Such investments may experience greater volatility in market value than
debt obligations which make regular payments of interest. The Trust will accrue
income on such investments for tax and accounting purposes, which is
distributable to shareholders and which, because no cash is received at the time
of accrual, may require the liquidation of other portfolio securities to satisfy
the Trust's distribution obligations.
EQUITY SECURITIES
The Trust may invest in all types of equity securities, including the following:
common stocks, preferred stocks and preference stocks; and securities such as
bonds, warrants or rights that are convertible into stocks. These securities may
be listed on securities exchanges, traded in various over-the-counter markets or
have no organized market.
FUTURES CONTRACTS
The Trust may purchase and sell futures contracts ("Futures Contracts") on
interest rates or interest-rate related instruments. The Trust may also purchase
and sell Futures Contracts on foreign or domestic fixed income securities or
indices of such securities including municipal bond indices and any other
indices of foreign or domestic fixed income securities that may become available
for trading. Such investment strategies will be used for hedging purposes and
for non-hedging purposes, subject to applicable law.
A Futures Contract is a bilateral agreement providing for the purchase and
sale of a specified type and amount of a financial instrument or commodity, or
for the making and acceptance of a cash settlement, at a stated time in the
future for a fixed price. By its terms, a Futures Contract provides for a
specified settlement month in which, in the case of the majority of commodities
and interest rate futures contracts, the underlying commodities or fixed income
securities are delivered by the seller and paid for by the purchaser, or on
which, in the case of index futures contracts and certain interest rate futures
contracts, the difference between the price at which the contract was entered
into and the contract's closing value is settled between the purchaser and
seller in cash. Futures Contracts differ from options in that they are bilateral
agreements, with both the purchaser and the seller equally obligated to complete
the transaction. Futures Contracts call for settlement only on the expiration
date and cannot be "exercised" at any other time during their term.
The purchase or sale of a Futures Contract differs from the purchase or sale
of a security or the purchase of an option in that no purchase price is paid or
received. Instead, an amount of cash or cash equivalents, which varies but may
be as low as 5% or less of the value of the contract, must be deposited with the
broker as "initial margin." Subsequent payments to and from the broker, referred
to as "variation margin," are made on a daily basis as the value of the index or
instrument underlying the Futures Contract fluctuates, making positions in the
Futures Contract more or less valuable -- a process known as "mark-to-market."
Interest rate Futures Contracts may be purchased or sold to attempt to
protect against the effects of interest rate changes on the Trust's current or
intended investments in fixed income securities. For example, if the Trust owned
long-term bonds and interest rates were expected to increase, the Trust might
enter into interest rate futures contracts for the sale of debt securities. Such
a sale would have much the same effect as selling some of the long-term bonds in
the Trust's portfolio. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of the Trust's interest
rate futures contracts would increase at approximately the same rate, subject to
the correlation risks described below, thereby keeping the net asset value of
the Trust from declining as much as it otherwise would have.
Similarly, if interest rates were expected to decline, interest rate futures
contracts may be purchased to hedge in anticipation of subsequent purchases of
long-term bonds at higher prices. Since the fluctuations in the value of the
interest rate futures contracts should be similar to that of long-term bonds,
the Trust could protect itself against the effects of the anticipated rise in
the value of long-term bonds without actually buying them until the necessary
cash became available or the market had stabilized. At that time, the interest
rate futures contracts could be liquidated and the Trust's cash reserves could
then be used to buy long-term bonds on the cash market. The Trust could
accomplish similar results by selling bonds with long maturities and investing
in bonds with short maturities when interest rates are expected to increase.
However, since the futures market may be more liquid than the cash market in
certain cases or at certain times, the use of interest rate futures contracts as
a hedging technique may allow the Trust to hedge its interest rate risk without
having to sell its portfolio securities.
The use by the Trust of Futures Contracts also involves the risks described
under the caption "Special Risk Factors -- Futures, Swaps and Other Derivative
Transactions" in this Appendix.
INDEXED SECURITIES
The Trust may purchase securities with principal and/or interest payments whose
prices are indexed to the prices of other securities, securities indices,
precious metals or other commodities, or other financial indicators. Indexed
securities typically, but not always, are debt securities or deposits whose
value at maturity or coupon rate is determined by reference to a specific
instrument or statistic. The Trust may also purchase indexed deposits with
similar characteristics. Gold-indexed securities, for example, typically
provide for a maturity value that depends on the price of gold, resulting in a
security whose price tends to rise and fall together with gold prices. Certain
indexed securities may expose the Trust to the risk of loss of all or a portion
of the principal amount of its investment and/or the interest that might
otherwise have been earned on the amount invested.
The performance of indexed securities depends to a great extent on the
performance of the security or other instrument to which they are indexed, and
may also be influenced by interest rate changes in the U.S. and abroad. At the
same time, indexed securities are subject to the credit risks associated with
the issuer of the security, and their values may decline substantially if the
issuer's creditworthiness deteriorates. Recent issuers of indexed securities
have included banks, corporations, and certain U.S. Government-sponsored
entities.
INVERSE FLOATING RATE OBLIGATIONS
The Trust may invest in so-called "inverse floating rate obligations" or
"residual interest bonds" or other obligations or certificates relating thereto
structured to have similar features. In creating such an obligation, a
municipality issues a certain amount of debt and pays a fixed interest rate.
Half of the debt is issued as variable rate short term obligations, the interest
rate of which is reset at short intervals, typically 35 days. The other half of
the debt is issued as inverse floating rate obligations, the interest rate of
which is calculated based on the difference between a multiple of (approximately
two times) the interest paid by the issuer and the interest paid on the
short-term obligation. Under usual circumstances, the holder of the inverse
floating rate obligation can generally purchase an equal principal amount of the
short term obligation and link the two obligations in order to create long-term
fixed rate bonds. Because the interest rate on the inverse floating rate
obligation is determined by subtracting the short-term rate from a fixed amount,
the interest rate will decrease as the short-term rate increases and will
increase as the short-term rate decreases. The magnitude of increases and
decreases in the market value of inverse floating rate obligations may be
approximately twice as large as the comparable change in the market value of an
equal principal amount of long-term bonds which bear interest at the rate paid
by the issuer and have similar credit quality, redemption and maturity
provisions.
INVESTMENT IN OTHER INVESTMENT COMPANIES
The Trust may invest in other investment companies. The total return on such
investment will be reduced by the operating expenses and fees of such other
investment companies, including advisory fees.
CLOSED-END FUNDS. The Trust may invest in closed-end investment companies.
Such investment may involve the payment of substantial premiums above the value
of such investment companies" portfolio securities.
LEVERAGING TRANSACTIONS
The Trust may engage in the types of transactions described below, which
involve "leverage" because in each case the Trust receives cash which it can
invest in portfolio securities and has a future obligation to make a payment.
The use of these transactions by the Trust will generally cause its net asset
value to increase or decrease at a greater rate than would otherwise be the
case. Any investment income or gains earned from the portfolio securities
purchased with the proceeds from these transactions which is in excess of the
expenses associated from these transactions can be expected to cause the net
asset value of the Trust's shares and distributions on the Trust's shares to
rise more quickly than would otherwise be the case. Conversely, if the
investment income or gains earned from the portfolio securities purchased with
proceeds from these transactions fail to cover the expenses associated with
these transactions, the net asset value of the Trust's shares is likely to
decrease more quickly than otherwise would be the case and distributions
thereon will be reduced or eliminated. Hence, these transactions are
speculative, involve leverage and increase the risk of owning or investing in
the shares of the Trust. These transactions also increase the Trust's expenses
because of interest and similar payments and administrative expenses
associated with them. Unless the appreciation and income on assets purchased
with proceeds from these transactions exceed the costs associated with them,
the use of these transactions by the Trust would diminish the investment
performance of the Trust compared with what it would have been without using
these transactions.
BANK BORROWINGS: The Trust may borrow money for investment purposes from
banks and invest the proceeds in accordance with its investment objectives and
policies.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Trust may enter into mortgage
"dollar roll" transactions pursuant to which it sells mortgage-backed securities
for delivery in the future and simultaneously contracts to repurchase
substantially similar securities on a specified future date. During the roll
period, the Trust foregoes principal and interest paid on the mortgage-backed
securities. The Trust is compensated for the lost interest by the difference
between the current sales price and the lower price for the future purchase
(often referred to as the "drop") as well as by the interest earned on, and
gains from, the investment of the cash proceeds of the initial sale. The Trust
may also be compensated by receipt of a commitment fee.
If the income and capital gains from the Trust's investment of the cash from
the initial sale do not exceed the income, capital appreciation and gain or loss
that would have been realized on the securities sold as part of the dollar roll,
the use of this technique will diminish the investment performance of the Trust
compared with what the performance would have been without the use of the dollar
rolls. Dollar roll transactions involve the risk that the market value of the
securities the Trust is required to purchase may decline below the agreed upon
repurchase price of those securities. If the broker/dealer to whom the Trust
sells securities becomes insolvent, the Trust's right to purchase or repurchase
securities may be restricted. Successful use of mortgage dollar rolls may depend
upon the Adviser's ability to correctly predict interest rates and prepayments.
There is no assurance that dollar rolls can be successfully employed. The Trust
will only enter into "covered" mortgage dollar-roll transactions, meaning that
the Trust segregates liquid securities it will repurchase and does not use these
transactions as a form of leverage.
REPURCHASE AGREEMENTS
The Trust may enter into repurchase agreements with sellers who are member firms
(or a subsidiary thereof) of the New York Stock Exchange or members of the
Federal Reserve System, recognized primary U.S. Government securities dealers or
institutions which the Adviser has determined to be of comparable
creditworthiness. The securities that the Trust purchases and holds through its
agent are U.S. Government Securities, the values of which are equal to or
greater than the repurchase price agreed to be paid by the seller. The
repurchase price may be higher than the purchase price, the difference being
income to the Trust, or the purchase and repurchase prices may be the same, with
interest at a standard rate due to the Trust together with the repurchase price
on repurchase. In either case, the income to the Trust is unrelated to the
interest rate on the U.S. Government Securities.
The repurchase agreement provides that in the event the seller fails to pay
the amount agreed upon on the agreed upon delivery date or upon demand, as the
case may be, the Trust will have the right to liquidate the securities. If at
the time the Trust is contractually entitled to exercise its right to liquidate
the securities, the seller is subject to a proceeding under the bankruptcy laws
or its assets are otherwise subject to a stay order, the Trust's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Trust. The Trust has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Trust
only enters into repurchase agreements after the Adviser has determined that the
seller is creditworthy, and the Adviser monitors that seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value of the
securities (which are marked to market every business day) is required to be
greater than the repurchase price, and the Trust has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
collateral.
RESTRICTED SECURITIES
The Trust may purchase securities that are not registered under the Securities
Act of 1933, as amended ("1933 Act") ("restricted securities"), including those
that can be offered and sold to "qualified institutional buyers" under Rule 144A
under the 1933 Act ("Rule 144A securities") and commercial paper issued under
Section 4(2) of the 1933 Act ("4(2) Paper"). A determination is made, based upon
a continuing review of the trading markets for the Rule 144A security or 4(2)
Paper, whether such security is liquid and thus not subject to the Trust's
limitation on investing in illiquid investments. The Board of Trustees has
adopted guidelines and delegated to MFS the daily function of determining and
monitoring the liquidity of Rule 144A securities and 4(2) Paper. The Board,
however, retains oversight of the liquidity determinations focusing on factors
such as valuation, liquidity and availability of information. Investing in Rule
144A securities could have the effect of decreasing the level of liquidity in
the Trust to the extent that qualified institutional buyers become for a time
uninterested in purchasing these Rule 144A securities held in the Trust's
portfolio. Subject to the Trust's limitation on investments in illiquid
investments, the Trust may also invest in restricted securities that may not be
sold under Rule 144A, which presents certain risks. As a result, the Trust might
not be able to sell these securities when the Adviser wishes to do so, or might
have to sell them at less than fair value. In addition, market quotations are
less readily available. Therefore, judgment may at times play a greater role in
valuing these securities than in the case of unrestricted securities.
SHORT TERM INSTRUMENTS
The Trust may hold cash and invest in cash equivalents, such as short-term U.S.
Government Securities, commercial paper and bank instruments.
SWAPS AND RELATED DERIVATIVE INSTRUMENTS
The Trust may enter into interest rate swaps and other types of available swap
agreements, including swaps on securities, commodities and indices, and related
types of derivatives, such as caps, collars and floors. A swap is an agreement
between two parties pursuant to which each party agrees to make one or more
payments to the other on regularly scheduled dates over a stated term, based on
different interest rates, security or commodity prices, the prices or rates of
other types of financial instruments or assets or the levels of specified
indices. Under a typical swap, one party may agree to pay a fixed rate or a
floating rate determined by reference to a specified instrument, rate or index,
multiplied in each case by a specified amount (the "notional amount"), while the
other party agrees to pay an amount equal to a different floating rate
multiplied by the same notional amount. On each payment date, the obligations of
parties are netted, with only the net amount paid by one party to the other. All
swap agreements entered into by the Trust with the same counterparty are
generally governed by a single master agreement, which provides for the netting
of all amounts owed by the parties under the agreement upon the occurrence of an
event of default, thereby reducing the credit risk to which such party is
exposed.
Swap agreements are typically individually negotiated and structured to
provide exposure to a variety of different types of investments or market
factors. Swap agreements may be entered into for hedging or non-hedging purposes
and therefore may increase or decrease the Trust's exposure to the underlying
instrument, rate, asset or index. Swap agreements can take many different forms
and are known by a variety of names. The Trust is not limited to any particular
form or variety of swap agreement if the Adviser determines it is consistent
with the Trust's investment objective and policies.
For example, the Trust may enter into an interest rate swap in order to
protect against declines in the value of fixed income securities held by the
Trust. In such an instance, the Trust would agree with a counterparty to pay a
fixed rate (multiplied by a notional amount) and the counterparty would agree to
pay a floating rate multiplied by the same notional amount. If interest rates
rise, resulting in a diminution in the value of the Trust's portfolio, the Trust
would receive payments under the swap that would offset, in whole or part, such
diminution in value. The Trust might also enter into a swap on a particular
security, or a basket or index of securities, in order to gain exposure to the
underlying security or securities, as an alternative to purchasing such
securities. Such transactions could be more efficient or less costly in certain
instances than an actual purchase or sale of the securities.
The Trust may enter into other related types of over-the-counter
derivatives, such as "caps", "floors" and "collars", for the same types of
hedging or non-hedging purposes. Caps and floors are similar to swaps, except
that one party pays a fee at the time the transaction is entered into and has no
further payment obligations, while the other party is obligated to pay an amount
equal to the amount by which a specified fixed or floating rate exceeds or is
below another rate (multiplied by a notional amount). A collar is in effect a
combination of a cap and a floor, with payments made only within or outside a
specified range of prices or rates.
The Trust will maintain liquid and unencumbered assets to cover its current
obligations under swap and other over-the-counter derivative transactions. If
the Trust enters into a swap agreement on a net basis (i.e., the two payment
streams are netted out, with the Trust receiving or paying, as the case may be,
only the net amount of the two payments), the Trust will maintain liquid and
unencumbered assets with a daily value at least equal to the excess, if any, of
the Trust's accrued obligations under the swap agreement over the accrued amount
the Trust is entitled to receive under the agreement. If the Trust enters into a
swap agreement on other than a net basis, it will maintain liquid and
unencumbered assets with a value equal to the full amount of the Trust's accrued
obligations under the agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the underlying price, rate or index level that
determines the amount of payments to be made under the arrangement. If the
Adviser is incorrect in its forecasts of such factors, the investment
performance of the Trust would be less than what it would have been if these
investment techniques had not been used. If a swap agreement calls for payments
by the Trust, the Trust must be prepared to make such payments when due. In
addition, if the counterparty's creditworthiness would decline, the value of the
swap agreement would be likely to decline, potentially resulting in losses.
If the counterparty defaults, the Trust's risk of loss consists of the net
amount of payments that the Trust is contractually entitled to receive. The
Trust anticipates that it will be able to eliminate or reduce its exposure under
these arrangements by assignment or other disposition or by entering into an
offsetting agreement with the same or another counterparty, but there can be no
assurance that it will be able to do so.
The uses by the Trust of swaps and related derivative instruments also
involves the risks described under the caption "Special Risk Factors -- Futures,
Swaps and Other Derivative Transactions" in this Appendix.
TEMPORARY BORROWINGS
The Trust may borrow money for temporary purposes (e.g., to meet redemption
requests or settle outstanding purchases of portfolio securities).
TEMPORARY DEFENSIVE POSITIONS
The Trust may temporarily invest either in tax-exempt securities in the higher
rating categories of recognized rating agencies or in cash or cash equivalent
short-term obligations of similar quality, including, but not limited to,
short-term municipal obligations, certificates of deposit, commercial paper,
short-term notes, obligations issued or guaranteed by the U.S. Government, its
agencies, authorities or instrumentalities and repurchase agreements. Interest
on certain of these short-term obligations will be subject to federal income
tax.
"WHEN-ISSUED" SECURITIES
The Trust may purchase securities on a "when-issued" or on a "forward delivery"
basis which means that the securities will be delivered to the Trust at a future
date usually beyond customary settlement time. The commitment to purchase a
security for which payment will be made on a future date may be deemed a
separate security. In general, the Trust does not pay for such securities until
received, and does not start earning interest on the securities until the
contractual settlement date. While awaiting delivery of securities purchased on
such bases, the Trust will identify liquid and unencumbered assets equal to its
forward delivery commitment.
SPECIAL RISK FACTORS -- FUTURES, SWAPS AND OTHER DERIVATIVE TRANSACTIONS
RISK OF IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE TRUST'S
PORTFOLIO: The Trust's ability effectively to hedge all or a portion of its
portfolio through transactions in derivatives, including Futures Contracts,
swaps and other types of derivatives depends on the degree to which price
movements in the underlying index or instrument correlate with price movements
in the relevant portion of the Trust's portfolio. In the case of derivative
instruments based on an index, the portfolio will not duplicate the components
of the index, and in the case of derivative instruments on fixed income
securities, the portfolio securities which are being hedged may not be the same
type of obligation underlying such derivatives. The use of derivatives for
"cross hedging" purposes may involve greater correlation risks. Consequently,
the Trust bears the risk that the price of the portfolio securities being hedged
will not move in the same amount or direction as the underlying index or
obligation.
The trading of derivatives for hedging purposes entails the additional risk
of imperfect correlation between movements in the price of the derivative and
the price of the underlying index or obligation. The anticipated spread between
the prices may be distorted due to the differences in the nature of the markets
such as differences in margin requirements, the liquidity of such markets and
the participation of speculators in the derivatives markets. In this regard,
trading by speculators in derivatives has in the past occasionally resulted in
market distortions, which may be difficult or impossible to predict,
particularly near the expiration of such instruments.
RISKS OF NON-HEDGING TRANSACTIONS: The Trust may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes. Non-hedging
transactions in such instruments involve greater risks and may result in losses
which may not be offset by increases in the value of portfolio securities or
declines in the cost of securities to be acquired. The Trust will only write
covered options, such that liquid and unencumbered assets necessary to satisfy
an option exercise will be identified, unless the option is covered in such
other manner as may be in accordance with the rules of the exchange on which, or
the counterparty with which, the option is traded and applicable laws and
regulations. Nevertheless, the method of covering an option employed by the
Trust may not fully protect it against risk of loss and, in any event, the Trust
could suffer losses on the option position which might not be offset by
corresponding portfolio gains. The Trust may also enter into futures, Forward
Contracts or swaps for non-hedging purposes. For example, the Trust may enter
into such a transaction as an alternative to purchasing or selling the
underlying instrument or to obtain desired exposure to an index or market. In
such instances, the Trust will be exposed to the same economic risks incurred in
purchasing or selling the underlying instrument or instruments. However,
transactions in futures, Forward Contracts or swaps may be leveraged, which
could expose the Trust to greater risk of loss than such purchases or sales.
Entering into transactions in derivatives for other than hedging purposes,
therefore, could expose the Trust to significant risk of loss if the prices,
rates or values of the underlying instruments or indices do not move in the
direction or to the extent anticipated.
With respect to the writing of straddles on securities, the Trust incurs the
risk that the price of the underlying security will not remain stable, that one
of the options written will be exercised and that the resulting loss will not be
offset by the amount of the premiums received. Such transactions, therefore,
create an opportunity for increased return by providing the Trust with two
simultaneous premiums on the same security, but involve additional risk, since
the Trust may have an option exercised against it regardless of whether the
price of the security increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET: Prior to exercise or
expiration, a futures or option position can only be terminated by entering into
a closing purchase or sale transaction. This requires a secondary market for
such instruments on the exchange on which the initial transaction was entered
into. While the Trust will enter into options or futures positions only if there
appears to be a liquid secondary market therefor, there can be no assurance that
such a market will exist for any particular contract at any specific time. In
that event, it may not be possible to close out a position held by the Trust,
and the Trust could be required to purchase or sell the instrument underlying an
option, make or receive a cash settlement or meet ongoing variation margin
requirements. Under such circumstances, if the Trust has insufficient cash
available to meet margin requirements, it will be necessary to liquidate
portfolio securities or other assets at a time when it is disadvantageous to do
so. The inability to close out options and futures positions, therefore, could
have an adverse impact on the Trust's ability effectively to hedge its
portfolio, and could result in trading losses.
The liquidity of a secondary market in a Futures Contract or option thereon
may be adversely affected by "daily price fluctuation limits," established by
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures or option positions and requiring
traders to make additional margin deposits. Prices have in the past moved to the
daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk of
trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
MARGIN: Because of low initial margin deposits made upon the establishment
of a futures, forward or swap position (certain of which may require no initial
margin deposits) and the writing of an option, such transactions involve
substantial leverage. As a result, relatively small movements in the price of
the contract can result in substantial unrealized gains or losses. Where the
Trust enters into such transactions for hedging purposes, any losses incurred in
connection therewith should, if the hedging strategy is successful, be offset,
in whole or in part, by increases in the value of securities or other assets
held by the Trust or decreases in the prices of securities or other assets the
Trust intends to acquire. Where the Trust enters into such transactions for
other than hedging purposes, the margin requirements associated with such
transactions could expose the Trust to greater risk.
POTENTIAL BANKRUPTCY OF A CLEARINGHOUSE OR BROKER: When the Trust enters
into transactions in exchange-traded futures or options, it is exposed to the
risk of the potential bankruptcy of the relevant exchange clearinghouse or the
broker through which the Trust has effected the transaction. In that event, the
Trust might not be able to recover amounts deposited as margin, or amounts owed
to the Trust in connection with its transactions, for an indefinite period of
time, and could sustain losses of a portion or all of such amounts. Moreover,
the performance guarantee of an exchange clearinghouse generally extends only to
its members and the Trust could sustain losses, notwithstanding such guarantee,
in the event of the bankruptcy of its broker.
TRADING AND POSITION LIMITS: The exchanges on which futures and options are
traded may impose limitations governing the maximum number of positions on the
same side of the market and involving the same underlying instrument which may
be held by a single investor, whether acting alone or in concert with others
(regardless of whether such contracts are held on the same or different
exchanges or held or written in one or more accounts or through one or more
brokers). Further, the CFTC and the various contract markets have established
limits referred to as "speculative position limits" on the maximum net long or
net short position which any person may hold or control in a particular futures
or option contract. An exchange may order the liquidation of positions found to
be in violation of these limits and it may impose other sanctions or
restrictions. The Adviser does not believe that these trading and position
limits will have any adverse impact on the strategies for hedging the portfolios
of the Trust.
RISKS OF OPTIONS ON FUTURES CONTRACTS: The amount of risk the Trust assumes
when it purchases an Option on a Futures Contract is the premium paid for the
option, plus related transaction costs. In order to profit from an option
purchased, however, it may be necessary to exercise the option and to liquidate
the underlying Futures Contract, subject to the risks of the availability of a
liquid offset market described herein. The writer of an Option on a Futures
Contract is subject to the risks of commodity futures trading, including the
requirement of initial and variation margin payments, as well as the additional
risk that movements in the price of the option may not correlate with movements
in the price of the underlying security, index, currency or Futures Contract.
<PAGE>
APPENDIX B
RATINGS OF INVESTMENTS
The ratings of Moody's, S&P and Fitch IBCA, Duff & Phelps represent their
opinions as to the quality of various debt instruments. It should be emphasized,
however, that ratings are not absolute standards of quality. Consequently, debt
instruments with the same maturity, coupon and rating may have different yields
while debt instruments of the same maturity and coupon with different ratings
may have the same yield.
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
STANDARD & POOR'S RATINGS SERVICES
AAA: An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is EXTREMELY STRONG.
AA: An obligation rated AA differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is VERY STRONG.
A: An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still STRONG.
BBB: An obligation rated BBB exhibits ADEQUATE protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation and C
the highest. While such obligations will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or major
exposures to adverse conditions.
BB: An obligation rated BB is LESS VULNERABLE to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated B is MORE VULNERABLE to nonpayment than obligations rated
BB, but the obligor currently has the capacity to meet its financial commitment
on the obligation. Adverse business, financial, or economic conditions will
likely impair the obligor's capacity or willingness to meet its financial
commitment on the obligation.
CCC: An obligation rated CCC is CURRENTLY VULNERABLE to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions the obligor is not likely to
have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.
C: Subordinated debt or preferred stock obligation rated C is CURRENTLY HIGHLY
VULNERABLE to nonpayment. The C rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued. A C rating will also be
assigned to a preferred stock issue in arrears on dividends or sinking Trust
payments, but that is currently paying.
D: An obligation rated D is in payment default. The D rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
FITCH IBCA, DUFF & PHELPS
AAA
HIGHEST CREDIT QUALITY. "AAA" ratings denote the lowest expectation of credit
risk. They are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA
VERY HIGH CREDIT QUALITY. "AA" ratings denote a very low expectation of credit
risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A
HIGH CREDIT QUALITY. "A" ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
BBB
GOOD CREDIT QUALITY. "BBB" ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
SPECULATIVE GRADE
BB
SPECULATIVE. "BB" ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are not investment
grade.
B
HIGHLY SPECULATIVE. "B" ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favourable business and economic environment.
CCC, CC, C
HIGH DEFAULT RISK. Default is a real possibility. Capacity for meeting financial
commitments is solely reliant upon sustained, favourable business or economic
developments. A "CC" rating indicates that default of some kind appears
probable. "C" ratings signal imminent default.
DDD, DD, D
DEFAULT. The ratings of obligations in this category are based on their
prospects for achieving partial or full recovery in a reorganization or
liquidation of the obligor. While expected recovery values are highly
speculative and cannot be estimated with any precision, the following serve as
general guidelines. "DDD" obligations have the highest potential for recovery,
around 90% - 100% of outstanding amounts and accrued interest. "DD" indicates
potential recoveries in the range of 50% - 90% and "D" the lowest recovery
potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated "DD" and "D" are generally undergoing a formal
reorganization or liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect of repaying all obligations.
NOTES TO LONG-TERM AND SHORT-TERM RATINGS:
"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the "AAA" Long-term rating
category, to categories below "CCC", or to Short-term ratings other than "F1".
"NR" indicates that Fitch does not rate the issuer or issue in question.
"Withdrawn": A rating is withdrawn when Fitch deems the amount of information
available to be inadequate for rating purposes, or when an obligation matures,
is called, or refinanced.
Rating Watch: Ratings are placed on Rating Watch to notify investors that there
is a reasonable probability of a rating change and the likely direction of such
change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. Rating Watch is typically resolved over a relatively
short period.
<PAGE>
APPENDIX C
AUCTION PROCEDURES
The following procedures will be set forth in the Statement. The terms not
defined below are defined in the Glossary or in the Prospectus or this Statement
of Additional Information.
1. ORDERS.
(a) Prior to the Submission Deadline on each Auction Date for shares of a
series of Municipal Preferred:
(i) each Beneficial Owner of shares of such series may submit to its
Broker-Dealer by telephone or otherwise information as to:
(A) the number of Outstanding shares, if any, of such series held by
such Beneficial Owner which such Beneficial Owner desires to continue to
hold without regard to the Applicable Rate for shares of such series for
the next succeeding Rate Period of such shares;
(B) the number of Outstanding shares, if any, of such series held by
such Beneficial Owner which such Beneficial Owner offers to sell if the
Applicable Rate for shares of such series for the next succeeding Rate
Period of shares of such series shall be less than the rate per annum
specified by such Beneficial Owner; and/or
(C) the number of Outstanding shares, if any, of such series held by
such Beneficial Owner which such Beneficial Owner offers to sell without
regard to the Applicable Rate for shares of such series for the next
succeeding Rate Period of shares of such series;
and
(ii) one or more Broker-Dealers, using lists of Potential Beneficial
Owners, shall in good faith for the purpose of conducting a competitive
Auction in a commercially reasonable manner, contact Potential Beneficial
Owners (by telephone or otherwise), including Persons that are not
Beneficial Owners, on such lists to determine the number of shares, if any,
of such series which each such Potential Beneficial Owner offers to purchase
if the Applicable Rate for shares of such series for the next succeeding
Rate Period of shares of such series shall not be less than the rate per
annum specified by such Potential Beneficial Owner.
For purposes hereof, the communication by a Beneficial Owner or Potential
Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the Auction
Agent, of information referred to in clause (i)(A), (i)(B), (i)(C), or (ii)
of this subparagraph (a) is hereinafter referred to as an "Order" and
collectively as "Orders" and each Beneficial Owner and each Potential
Beneficial Owner placing an Order with a Broker-Dealer, and such
Broker-Dealer placing an Order with the Auction Agent, is hereinafter
referred to as a "Bidder" and collectively as "Bidders"; an Order containing
the information referred to in clause (i)(A) of this subparagraph (a) is
hereinafter referred to as a "Hold Order" and collectively as "Hold Orders";
an Order containing the information referred to in clause (i)(B) or (ii) of
this subparagraph (a) is hereinafter referred to as a "Bid" and collectively
as "Bids"; and an Order containing the information referred to in clause
(i)(C) of this subparagraph (a) is hereinafter referred to as a "Sell Order"
and collectively as "Sell Orders."
(b)(i) A Bid by a Beneficial Owner or an Existing Holder of shares of a
series of Municipal Preferred subject to an Auction on any Auction Date
shall constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such series specified in
such Bid if the Applicable Rate for shares of such series determined on
such Auction Date shall be less than the rate specified therein;
(B) such number or a lesser number of Outstanding shares of such
series to be determined as set forth in paragraph 4(a)(iv) herein if the
Applicable Rate for shares of such series determined on such Auction
Date shall be equal to the rate specified therein; or
(C) the number of Outstanding shares of such series specified in
such Bid if the rate specified therein shall be higher than the Maximum
Rate for shares of such series, or such number or a lesser number of
Outstanding shares of such series to be determined as set forth in
paragraph 4(b)(iii) herein if the rate specified therein shall be higher
than the Maximum Rate for shares of such series and Sufficient Clearing
Bids for shares of such series do not exist.
(ii) A Sell Order by a Beneficial Owner or an Existing Holder of shares
of a series of Municipal Preferred subject to an Auction on any Auction Date
shall constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such series specified in
such Sell Order; or
(B) such number or a lesser number of Outstanding shares of such
series as set forth in paragraph 4(b)(iii) herein if Sufficient Clearing
Bids for shares of such series do not exist;
provided, however, that a Broker-Dealer that is an Existing Holder with
respect to shares of a series of Municipal Preferred shall not be liable to
any Person for failing to sell such shares pursuant to a Sell Order
described in the proviso to paragraph 2(c) herein if (1) such shares were
transferred by the Beneficial Owner thereof without compliance by such
Beneficial Owner or its transferee Broker-Dealer (or other transferee
person, if permitted by the Trust) with the provisions of paragraph 7 herein
or (2) such Broker-Dealer has informed the Auction Agent pursuant to the
terms of its Broker-Dealer Agreement that, according to such Broker-Dealer's
records, such Broker-Dealer believes it is not the Existing Holder of such
shares.
(iii) A Bid by a Potential Beneficial Holder or a Potential Holder of
shares of a series of Municipal Preferred subject to an Auction on any
Auction Date shall constitute an irrevocable offer to purchase:
(A) the number of Outstanding shares of such series specified in
such Bid if the Applicable Rate for shares of such series determined on
such Auction Date shall be higher than the rate specified therein; or
(B) such number or a lesser number of Outstanding shares of such
series as set forth in paragraph 4(a)(v) herein if the Applicable Rate
for shares of such series determined on such Auction Date shall be equal
to the rate specified therein.
(c) No Order for any number of shares of Municipal Preferred other
than whole shares shall be valid.
2. SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT.
(a) Each Broker-Dealer shall submit in writing or over the internet to the
Auction Agent prior to the Submission Deadline on each Auction Date all Orders
for shares of Municipal Preferred of a series subject to an Auction on such
Auction Date obtained by such Broker-Dealer, designating itself (unless
otherwise permitted by the Trust) as an Existing Holder in respect of shares
subject to Orders submitted or deemed submitted to it by Beneficial Owners and
as a Potential Holder in respect of shares subject to Orders submitted to it by
Potential Beneficial Owners, and shall specify with respect to each Order for
such shares:
(i) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Trust);
(ii) the aggregate number of shares of such series that are the
subject of such Order;
(iii) to the extent that such Bidder is an Existing Holder of shares
of such series:
(A) the number of shares, if any, of such series subject to any Hold
Order of such Existing Holder;
(B) the number of shares, if any, of such series subject to any Bid
of such Existing Holder and the rate specified in such Bid; and
(C) the number of shares, if any, of such series subject to any Sell
Order of such Existing Holder; and
(iv) to the extent such Bidder is a Potential Holder of shares of such
series, the rate and number of shares of such series specified in such
Potential Holder's Bid.
(b) If any rate specified in any Bid contains more than three figures to the
right of the decimal point, the Auction Agent shall round such rate up to the
next highest one thousandth (.001) of 1%.
(c) If an Order or Orders covering all of the Outstanding shares of
Municipal Preferred of a series held by any Existing Holder is not submitted to
the Auction Agent prior to the Submission Deadline, the Auction Agent shall deem
a Hold Order to have been submitted by or on behalf of such Existing Holder
covering the number of Outstanding shares of such series held by such Existing
Holder and not subject to Orders submitted to the Auction Agent; provided,
however, that if an Order or Orders covering all of the Outstanding shares of
such series held by any Existing Holder is not submitted to the Auction Agent
prior to the Submission Deadline for an Auction relating to a Special Rate
Period consisting of more than 28 Rate Period Days, the Auction Agent shall deem
a Sell Order to have been submitted by or on behalf of such Existing Holder
covering the number of outstanding shares of such series held by such Existing
Holder and not subject to Orders submitted to the Auction Agent.
(d) If one or more Orders of an Existing Holder is submitted to the
Auction Agent covering in the aggregate more than the number of Outstanding
shares of Municipal Preferred of a series subject to an Auction held by such
Existing Holder, such Orders shall be considered valid in the following order
of priority:
(i) all Hold Orders for shares of such series shall be considered valid,
but only up to and including in the aggregate the number of Outstanding
shares of such series held by such Existing Holder, and if the number of
shares of such series subject to such Hold Orders exceeds the number of
Outstanding shares of such series held by such Existing Holder, the number
of shares subject to each such Hold Order shall be reduced pro rata to cover
the number of Outstanding shares of such series held by such Existing
Holder;
(ii) (A) any Bid for shares of such series shall be considered valid up
to and including the excess of the number of Outstanding shares of such
series held by such Existing Holder over the number of shares of such series
subject to any Hold Orders referred to in clause (i) above;
(B) subject to subclause (A), if more than one Bid of an Existing
Holder for shares of such series is submitted to the Auction Agent with
the same rate and the number of Outstanding shares of such series
subject to such Bids is greater than such excess, such Bids shall be
considered valid up to and including the amount of such excess, and the
number of shares of such series subject to each Bid with the same rate
shall be reduced pro rata to cover the number of shares of such series
equal to such excess;
(C) subject to subclauses (A) and (B), if more than one Bid of an
Existing Holder for shares of such series is submitted to the Auction
Agent with different rates, such Bids shall be considered valid in the
ascending order of their respective rates up to and including the amount
of such excess; and
(D) in any such event, the number, if any, of such Outstanding
shares of such series subject to any portion of Bids considered not
valid in whole or in part under this clause (ii) shall be treated as the
subject of a Bid for shares of such series by or on behalf of a
Potential Holder at the rate therein specified; and
(iii) all Sell Orders for shares of such series shall be considered
valid up to and including the excess of the number of Outstanding shares of
such series held by such Existing Holder over the sum of shares of such
series subject to valid Hold Orders referred to in clause (i) above and
valid Bids referred to in clause (ii) above.
(e) If more than one Bid for one or more shares of a series of Municipal
Preferred is submitted to the Auction Agent by or on behalf of any Potential
Holder, each such Bid submitted shall be a separate Bid with the rate and number
of shares therein specified.
(f) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to
the Submission Deadline on any Auction Date, shall be irrevocable.
3. DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND
APPLICABLE RATE.
(a) Not earlier than the Submission Deadline on each Auction Date for shares
of a series of Municipal Preferred, the Auction Agent shall assemble all valid
Orders submitted or deemed submitted to it by the Broker-Dealers in respect of
shares of such series (each such Order as submitted or deemed submitted by a
Broker-Dealer being hereinafter referred to individually as a "Submitted Hold
Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or as
a "Submitted Order" and collectively as "Submitted Hold Orders," "Submitted
Bids" or "Submitted Sell Orders," as the case may be, or as "Submitted Orders")
and shall determine for such series:
(i) the excess of the number of Outstanding shares of such series over
the number of Outstanding shares of such series subject to Submitted Hold
Orders (such excess being hereinafter referred to as the "Available
Municipal Preferred" of such series);
(ii) from the Submitted Orders for shares of such series whether:
(A) the number of Outstanding shares of such series subject to
Submitted Bids of Potential Holders specifying one or more rates equal
to or lower than the Maximum Rate for shares of such series;
exceeds or is equal to the sum of:
(B) the number of Outstanding shares of such series subject to
Submitted Bids of Existing Holders specifying one or more rates higher
than the Maximum Rate for shares of such series; and
(C) the number of Outstanding shares of such series subject to
Submitted Sell Orders
(in the event such excess or such equality exists (other than because
the number of shares of such series in subclauses (B) and (C) above is
zero because all of the Outstanding shares of such series are subject
to Submitted Hold Orders), such Submitted Bids in subclause (A) above
being hereinafter referred to collectively as "Sufficient Clearing
Bids" for shares of such series); and
(iii) if Sufficient Clearing Bids for shares of such series exist, the
lowest rate specified in such Submitted Bids (the "Winning Bid Rate" for
shares of such series) which if:
(A) (I) each such Submitted Bid of Existing Holders specifying such
lowest rate and (II) all other such Submitted Bids of Existing Holders
specifying lower rates were rejected, thus entitling such Existing
Holders to continue to hold the shares of such series that are subject
to such Submitted Bids; and
(B) (I) each such Submitted Bid of Potential Holders specifying such
lowest rate and (II) all other such Submitted Bids of Potential Holders
specifying lower rates were accepted;
would result in such Existing Holders described in subclause (A) above
continuing to hold an aggregate number of Outstanding shares of such
series which, when added to the number of Outstanding shares of such
series to be purchased by such Potential Holders described in subclause
(B) above, would equal not less than the Available Municipal Preferred of
such series.
(b) Promptly after the Auction Agent has made the determinations pursuant to
subparagraph (a) of this paragraph 3, the Auction Agent shall advise the Trust
of the Maximum Rate for shares of the series of Municipal Preferred for which an
Auction is being held on the Auction Date and, based on such determination, the
Applicable Rate for shares of such series for the next succeeding Rate Period
thereof as follows:
(i) if Sufficient Clearing Bids for shares of such series exist, that
the Applicable Rate for all shares of such series for the next succeeding
Rate Period thereof shall be equal to the Winning Bid Rate for shares of
such series so determined;
(ii) if Sufficient Clearing Bids for shares of such series do not exist
(other than because all of the Outstanding shares of such series are subject
to Submitted Hold Orders), that the Applicable Rate for all shares of such
series for the next succeeding Rate Period thereof shall be equal to the
Maximum Rate for shares of such series; or
(iii) if all of the Outstanding shares of such series are subject to
Submitted Hold Orders, that the Applicable Rate for all shares of such
series for the next succeeding Rate Period thereof shall be as set forth in
subparagraph (c) of this paragraph 3.
(c) For purposes of subparagraph (b)(iii) of this paragraph 3, the
Applicable Rate for shares of such series for the next succeeding Rate Period of
shares of such series shall be equal to the lesser of the Kenny Index (if such
Rate Period consists of fewer than 183 Rate Period Days) or the product of (A)
(I) the "AA" Composite Commercial Paper Rate on such Auction Date for such Rate
Period, if such Rate Period consists of fewer than 183 Rate Period Days; (II)
the Treasury Bill Rate on such Auction Date for such Rate Period, if such Rate
Period consists of more than 182 but fewer than 365 Rate Period Days; or (III)
the Treasury Note Rate on such Auction Date for such Rate Period, if such Rate
Period is more than 364 Rate Period Days (the rate described in the foregoing
clause (A)(I), (II) or (III), as applicable, being referred to herein as the
"Benchmark Rate") and (B) 1 minus the maximum marginal regular Federal
individual income tax rate applicable to ordinary income or the maximum marginal
regular Federal corporate income tax rate applicable to ordinary income,
whichever is greater; provided, however, that if the Trust has notified the
Auction Agent of its intent to allocate to shares of such series in such Rate
Period any net capital gains or other income taxable for federal income tax
purposes ("Taxable Income"), the Applicable Rate for shares of such series for
such Rate Period will be (i) if the Taxable Yield Rate (as defined below) is
greater than the Benchmark Rate, then the Benchmark Rate, or (ii) if the Taxable
Yield Rate is less than or equal to the Benchmark Rate, then the rate equal to
the sum of (x) the lesser of the Kenny Index (if such Rate Period consists of
fewer than 183 Rate Period Days) or the product of the Benchmark Rate multiplied
by the factor set forth in the preceding clause (B) and (y) the product of the
maximum marginal regular Federal individual income tax rate applicable to
ordinary income or the maximum marginal regular Federal corporate income tax
applicable to ordinary income, whichever is greater, multiplied by the Taxable
Yield Rate. For purposes of the foregoing, Taxable Yield Rate means the rate
determined by (a) dividing the amount of Taxable Income available for
distribution per such share of Municipal Preferred by the number of days in the
Dividend Period in respect of which such Taxable Income is contemplated to be
distributed, (b) multiplying the amount determined in (a) above by 365 (in the
case of a Dividend Period of 7 Rate Period Days) or 360 (in the case of any
other Dividend Period), and (c) dividing the amount determined in (b) above by
$25,000.
4. ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND
ALLOCATION OF SHARES.
Existing Holders shall continue to hold the shares of Municipal Preferred that
are subject to Submitted Hold Orders, and, based on the determinations made
pursuant to paragraph 3(a) herein, the Submitted Bids and Submitted Sell Orders
shall be accepted or rejected by the Auction Agent and the Auction Agent shall
take such other action as set forth below:
(a) If Sufficient Clearing Bids for shares of a series of Municipal
Preferred have been made, all Submitted Sell Orders with respect to shares
of such series shall be accepted and, subject to the provisions of
subparagraphs (d) and (e) of this paragraph 4, Submitted Bids with respect
to shares of such series shall be accepted or rejected as follows in the
following order of priority and all other Submitted Bids with respect to
shares of such series shall be rejected:
(i) Existing Holders" Submitted Bids for shares of such series
specifying any rate that is higher than the Winning Bid Rate for shares
of such series shall be accepted, thus requiring each such Existing
Holder to sell the shares of Municipal Preferred subject to such
Submitted Bids;
(ii) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for shares
of such series shall be rejected, thus entitling each such Existing
Holder to continue to hold the shares of Municipal Preferred subject to
such Submitted Bids;
(iii) Potential Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for shares
of such series shall be accepted;
(iv) Existing Holders' Submitted Bids for shares of such series
specifying a rate that is equal to the Winning Bid Rate for shares of
such series shall be rejected, thus entitling such Existing Holder to
continue to hold the share of Municipal Preferred subject to such
Submitted Bid, unless the number of Outstanding shares of Municipal
Preferred subject to all such Submitted Bids shall be greater than the
number of shares of Municipal Preferred ("remaining shares") in the
excess of the Available Municipal Preferred of such series over the
number of shares of Municipal Preferred subject to Submitted Bids
described in clauses (ii) and (iii) of this subparagraph (a), in which
event such Submitted Bid of such Existing Holder shall be rejected in
part, and such Existing Holder shall be entitled to continue to hold
shares of Municipal Preferred subject to such Submitted Bid, but only in
an amount equal to the number of shares of Municipal Preferred of such
series obtained by multiplying the number of remaining shares by a
fraction, the numerator of which shall be the number of Outstanding
shares of Municipal Preferred held by such Existing Holder subject to
such Submitted Bid and the denominator of which shall be the aggregate
number of Outstanding shares of Municipal Preferred subject to such
Submitted Bids made by all such Existing Holders that specified a rate
equal to the Winning Bid Rate for shares of such series; and
(v) Potential Holder's Submitted Bids for shares of such series
specifying a rate that is equal to the Winning Bid Rate of shares of
such series shall be accepted but only in an amount equal to the number
of shares of such series obtained by multiplying the number of shares in
the excess of the Available Municipal Preferred of such series over the
number of shares of Municipal Preferred subject to Submitted Bids
described in clauses (ii) through (iv) of this subparagraph (a) by a
fraction, the numerator of which shall be the number of Outstanding
shares of Municipal Preferred subject to such Submitted Bids and the
denominator of which shall be the aggregate number of Outstanding shares
of Municipal Preferred subject to such Submitted Bids made by all such
Potential Holders that specified a rate equal to the Winning Bid Rate
for shares of such series.
(b) If Sufficient Clearing Bids for shares of a series of Municipal
Preferred have not been made (other than because all of the Outstanding
shares of such series are subject to Submitted Hold Orders), subject to the
provisions of subparagraph (d) of this paragraph 4, Submitted Orders for
shares of such series shall be accepted or rejected as follows in the
following order of priority and all other Submitted Bids for shares of such
series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is equal to or lower than the Maximum Rate for
shares of such series shall be rejected, thus entitling such Existing
Holders to continue to hold the shares of Municipal Preferred subject to
such Submitted Bids;
(ii) Potential Holders' Submitted Bids for shares of such series
specifying any rate that is equal to or lower than the Maximum Rate for
shares of such series shall be accepted; and
(iii) Existing Holder's Submitted Bids for shares of such series
specifying any rate that is higher than the Maximum Rate for shares of
such series and the Submitted Sell Orders for shares of such series of
each Existing Holder shall be accepted, thus entitling each Existing
Holder that submitted or on whose behalf was submitted any such
Submitted Bid or Submitted Sell Order to sell the shares of such series
subject to such Submitted Bid or Submitted Sell Order, but in both cases
only in an amount equal to the number of shares of such series obtained
by multiplying the number of shares of such series subject to Submitted
Bids described in clause (ii) of this subparagraph (b) by a fraction,
the numerator of which shall be the number of Outstanding shares of such
series held by such Existing Holder subject to such Submitted Bid or
Submitted Sell Order and the denominator of which shall be the aggregate
number of Outstanding shares of such series subject to all such
Submitted Bids and Submitted Sell Orders.
(c) If all of the Outstanding shares of a series of Municipal Preferred
are subject to Submitted Hold Orders, all Submitted Bids for shares of such
series shall be rejected.
(d) If, as a result of the procedures described in clause (iv) or (v) of
subparagraph (a) or clause (iii) of subparagraph (b) of this paragraph 4,
any Existing Holder would be entitled or required to sell, or any Potential
Holder would be entitled or required to purchase, a fraction of a share of a
series of Municipal Preferred on any Auction Date, the Auction Agent shall,
in such manner as it shall determine in its sole discretion, round up or
down the number of shares of Municipal Preferred of such series to be
purchased or sold by any Existing Holder or Potential Holder on such Auction
Date as a result of such procedures so that the number of shares so
purchased or sold by each Existing Holder or Potential Holder on such
Auction Date shall be whole shares of Municipal Preferred.
(e) If, as a result of the procedures described in clause (v) of
subparagraph (a) of this paragraph 4, any Potential Holder would be entitled
or required to purchase less than a whole share of series of Municipal
Preferred on any Auction Date, the Auction Agent shall, in such manner as it
shall determine in its sole discretion, allocate shares of Municipal
Preferred of such series for purchase among Potential Holders so that only
whole shares of Municipal Preferred of such series are purchased on such
Auction Date as a result of such procedures by any Potential Holder, even if
such allocation results in one or more Potential Holders not purchasing
shares of Municipal Preferred of such series on such Auction Date.
(f) Based on the results of each Auction for shares of a series of
Municipal Preferred, the Auction Agent shall determine the aggregate number
of shares of such series to be purchased and the aggregate number of shares
of such series to be sold by Potential Holders and Existing Holders and,
with respect to each Potential Holder and Existing Holder, to the extent
that such aggregate number of shares to be purchased and such aggregate
number of shares to be sold differ, determine to which other Potential
Holder(s) or Existing Holder(s) they shall deliver, or from which other
Potential Holder(s) or Existing Holder(s) they shall receive, as the case
may be, shares of Municipal Preferred of such series. Notwithstanding any
provision of the Auction Procedures or the Settlement Procedures to the
contrary, in the event an Existing Holder or Beneficial Owner of shares of a
series of Municipal Preferred with respect to whom a Broker-Dealer submitted
a Bid to the Auction Agent for such shares that was accepted in whole or in
part, or submitted or is deemed to have submitted a Sell Order for such
shares that was accepted in whole or in part, fails to instruct its Agent
Member to deliver such shares against payment therefor, partial deliveries
of shares of Municipal Preferred that have been made in respect of Potential
Holders' or Potential Beneficial Owners' Submitted Bids for shares of such
series that have been accepted in whole or in part shall constitute good
delivery to such Potential Holders and Potential Beneficial Owners.
(g) Neither the Trust nor the Auction Agent nor any affiliate of either
shall have any responsibility or liability with respect to the failure of an
Existing Holder, a Potential Holder, a Beneficial Owner, a Potential
Beneficial Owner or its respective Agent Member to deliver shares of
Municipal Preferred of any series or to pay for shares of Municipal
Preferred of any series sold or purchased pursuant to the Auction Procedures
or otherwise.
5. NOTIFICATION OF ALLOCATIONS.
Except as noted below, whenever the Trust intends to include any net capital
gain or other income taxable for federal income tax purposes in any dividend on
shares of Municipal Preferred, the Trust shall, in the case of a Minimum Rate
Period or a Special Rate Period of 28 Rate Period Days or fewer, and may, in the
case of any other Special Rate Period, notify the Auction Agent of the amount to
be so included not later than the Dividend Payment Date next preceding the
Auction Date on which the Applicable Rate for such dividend is to be
established. Whenever the Auction Agent receives such notice from the Trust, it
will be required in turn to notify each Broker-Dealer, who, on or prior to such
Auction Date, in accordance with its Broker-Dealer Agreement, will be required
to notify its Beneficial Owners and Potential Beneficial Owners of shares of
Municipal Preferred believed by it to be interested in submitting an Order in
the Auction to be held on such Auction Date. The Trust may also include such net
capital gain or other income taxable for federal income tax purposes in a
dividend on shares of Municipal Preferred without giving advance notice if the
dividend is increased by a Gross-Up Payment. The Trust must notify the Auction
Agent of the additional amounts to be included in such dividend at least five
Business Days prior to the applicable Dividend Payment Date.
6. AUCTION AGENT.
For so long as any shares of Municipal Preferred are outstanding, the Auction
Agent, duly appointed by the Trust to so act, shall be in each case a commercial
bank, trust company or other financial institution independent of the Trust and
its affiliates (which however, may engage or have engaged in business
transactions with the Trust or its affiliates) and at no time shall the Trust or
any of its affiliates act as the Auction Agent in connection with the Auction
Procedures. If the Auction Agent resigns or for any reason its appointment is
terminated during any period that any shares of Municipal Preferred are
outstanding, the Board of Trustees shall use its best efforts promptly
thereafter to appoint another qualified commercial bank, trust company or
financial institution to act as the Auction Agent. The Auction Agent's registry
of Existing Holders of shares of a series of Municipal Preferred shall be
conclusive and binding on the Broker-Dealers. A Broker-Dealer may inquire of
the Auction Agent between 3:00 p.m. on the Business Day preceding an Auction for
shares of a series of Municipal Preferred and 9:30 a.m. on the Auction Date for
such Auction to ascertain the number of shares of a series in respect of which
the Auction Agent has determined such Broker-Dealer to be an Existing Holder.
If such Broker-Dealer believes it is the Existing Holder of fewer shares of such
series than specified by the Auction Agent in response to such Broker-Dealer's
inquiry, such Broker-Dealer may so inform the Auction Agent of that belief. Such
Broker-Dealer shall not, in its capacity as Existing Holder of shares of such
series, submit Orders in such Auction in respect of shares of such series
covering in the aggregate more than the number of shares of such series
specified by the Auction Agent in response to such Broker-Dealer's inquiry.
7. TRANSFER OF SHARES OF MUNICIPAL PREFERRED.
Unless otherwise permitted by the Trust, a Beneficial Owner or an Existing
Holder may sell, transfer or otherwise dispose of shares of Municipal Preferred
only in whole shares and only pursuant to a Bid or Sell Order placed with the
Auction Agent in accordance with the procedures described herein or to a
Broker-Dealer; provided, however, that (a) a sale, transfer or other disposition
of shares of Municipal Preferred from a customer of a Broker-Dealer who is
listed on the records of that Broker-Dealer as the holder of such shares to that
Broker-Dealer or another customer of that Broker-Dealer shall not be deemed to
be a sale, transfer or other disposition for purposes of this paragraph 7 if
such Broker-Dealer remains the Existing Holder of the shares so sold,
transferred or disposed of immediately after such sale, transfer or disposition
and (b) in the case of all transfers other than pursuant to Auctions, the
Broker-Dealer (or other Person, if permitted by the Trust) to whom such transfer
is made shall advise the Auction Agent of such transfer.
8. GLOBAL CERTIFICATE.
Prior to the commencement of a Voting Period, (i) all of the shares of a series
of Municipal Preferred outstanding from time to time shall be represented by one
global certificate registered in the name of the Securities Depository or its
nominee and (ii) no registration of transfer of shares of a series of Municipal
Preferred shall be made on the books of the Trust to any Person other than the
Securities Depository or its nominee.
<PAGE>
APPENDIX D
SETTLEMENT PROCEDURES
Capitalized terms used herein have the respective meanings specified in the
forepart of the Prospectus or the Glossary included in the Prospectus, as the
case may be.
(a) On each Auction Date for shares of Municipal Preferred, the Auction
Agent shall notify by telephone the Broker-Dealers that participated in the
Auction held on such Auction Date and submitted an Order to the Auction Agent as
or on behalf of an Existing Holder or Potential Holder of:
(i) the Applicable Rate fixed for the next Rate Period;
(ii) whether Sufficient Clearing Bids existed for the determination of
the Applicable Rate;
(iii) if such Broker-Dealer submitted a Bid or a Sell Order to the
Auction Agent as or on behalf of an Existing Holder, whether such Bid or
Sell Order was accepted or rejected, in whole or in part, and the number of
shares, if any, of Municipal Preferred then outstanding to be sold by such
Existing Holder;
(iv) if such Broker-Dealer submitted a Bid to the Auction Agent as or on
behalf of a Potential Holder, whether such Bid was accepted or rejected, in
whole or in part, and the number of shares, if any, of Municipal Preferred
to be purchased by such Potential Holder;
(v) if the aggregate number of shares of Municipal Preferred to be sold
by all Existing Holders with respect to whom such Broker-Dealer submitted
Bids or Sell Orders to the Auction Agent is different than the aggregate
number of shares of Municipal Preferred to be purchased by all Potential
Holders with respect to whom such Broker-Dealer submitted Bids to the
Auction Agent, the name or names of one or more other Broker-Dealers (and
the Agent Member, if any, of each such other Broker-Dealer) and the number
of shares of Municipal Preferred to be (x) purchased from one or more
Existing Holders with respect to whom such other Broker-Dealers submitted
Bids or Sell Orders to the Auction Agent, or (y) sold to one or more
Potential Holders with respect to whom such other Broker-Dealers submitted
Bids to the Auction Agent; and
(vi) the scheduled Auction Date of the next succeeding Auction for
shares of Municipal Preferred.
(b) On each Auction Date for shares of Municipal Preferred, each
Broker-Dealer that submitted an Order to the Auction Agent as or on behalf of
any Existing Holder or Potential Holder shall:
(i) advise each Existing Holder and Potential Holder (and each
Beneficial Owner and Potential Beneficial Owner) with respect to whom such
Broker-Dealer submitted a Bid or Sell Order to the Auction Agent whether
such Bid or Sell Order was accepted or rejected, in whole or in part;
(ii) instruct each Potential Holder (and each Potential Beneficial
Owner) with respect to whom such Broker-Dealer submitted a Bid to the
Auction Agent that was accepted, in whole or in part, to instruct such
Bidder's Agent Member to pay to such Broker-Dealer (or its Agent Member)
through the Securities Depository the amount necessary to purchase the
number of shares of Municipal Preferred to be purchased pursuant to such Bid
against receipt of such shares;
(iii) instruct each Existing Holder (and each Beneficial Owner) with
respect to whom such Broker-Dealer submitted a Bid to the Auction Agent that
was accepted, in whole or in part, or a Sell Order that was accepted, in
whole or in part, to instruct such Bidder's Agent Member to deliver to such
Broker-Dealer (or its Agent Member) through the Securities Depository the
number of shares of Municipal Preferred to be sold pursuant to such Bid or
Sell Order against payment therefor;
(iv) advise each Existing Holder (and each Beneficial Owner) with
respect to whom such Broker-Dealer submitted an Order to the Auction Agent
and each Potential Holder (and each Potential Beneficial Owner) with respect
to whom such Broker-Dealer submitted a Bid to the Auction Agent of the
Applicable Rate for the next succeeding Rate Period;
(v) advise each Existing Holder (and each Beneficial Owner) with respect
to whom such Broker-Dealer submitted an Order to the Auction Agent of the
Auction Date of the next succeeding Auction; and
(vi) advise each Potential Holder (and each Potential Beneficial Owner)
with respect to whom such Broker-Dealer submitted a Bid to the Auction Agent
that was accepted, in whole or in part, of the Auction Date of the next
succeeding Auction for Municipal Preferred.
(c) On the basis of the information provided to it pursuant to paragraph (a)
above, each Broker-Dealer that submitted a Bid or Sell Order to the Auction
Agent for any shares of Municipal Preferred shall allocate any funds received by
it (or its Agent Member) in respect of such shares pursuant to paragraph (b)(ii)
above and any shares of Municipal Preferred received by it (or its Agent Member)
pursuant to paragraph (b)(iii) above among the Potential Holders and Potential
Beneficial Owners, if any, with respect to whom such Broker-Dealer submitted
Bids to the Auction Agent for such shares, the Existing Holders and Beneficial
Owners, if any, with respect to whom such Broker-Dealer submitted Bids or Sell
Orders to the Auction Agent for such shares, and any Broker-Dealers identified
to it by the Auction Agent pursuant to paragraph (a)(v) above.
(d) On the Business Day after the Auction Date, the Securities Depository
shall execute the transactions described above, debiting and crediting the
accounts of the respective Agent Members as necessary to effect the purchases
and sales of shares of Municipal Preferred as determined in the Auction for
shares of Municipal Preferred.
<PAGE>
APPENDIX E
RATING AGENCY FUTURES AND OPTIONS RESTRICTIONS
The following restrictions will be set forth in the Statement creating the
preferred shares (the "Statement") of the Trust. The terms not defined below are
defined in the Glossary, the Prospectus, the Statement of Additional Information
or the Statement, filed as an exhibit to the Registration Statement of the
Trust. Reference is made to the Statement for the full text of the rating agency
restrictions on futures and options transactions and certain other actions or
investments by the Trust.
(a) For so long as any shares of Municipal Preferred are outstanding and
Moody's or Standard & Poor's, or both, are rating such shares, the Trust will
not, unless it has received confirmation from Moody's or Standard & Poor's, or
both, as appropriate, that any such action would not impair the ratings then
assigned by such rating agency to such shares, engage in any one or more of the
following transactions: purchase or sell futures contracts, write, purchase or
sell options on futures contracts or write put options (except covered put
options) or call options (except covered call options) on portfolio securities
except that the Trust may purchase or sell futures contracts based on the Bond
Buyer Municipal Bond Index (the "Municipal Index") or United States Treasury
Bonds or Notes ("Treasury Bonds") and write, purchase or sell put and call
options on such contracts (collectively, "Hedging Transactions"), subject to the
following limitations:
(i) the Trust will not engage in any Hedging Transaction based on the
Municipal Index (other than transactions which terminate a futures contract
or option held by the Trust by the Trust's taking an opposite position
thereto ("Closing Transactions")), which would cause the Trust at the time
of such transaction to own or have sold the least of (A) more than 1,000
outstanding futures contracts based on the Municipal Index, (B) outstanding
futures contracts based on the Municipal Index exceeding in number 25% of
the quotient of the Market Value of the Trust's total assets divided by
$1,000 or (C) outstanding futures contracts based on the Municipal Index
exceeding in number 10% of the average number of daily open interest futures
contracts based on the Municipal Index in the 30 days preceding the time of
effecting such transaction as reported by The Wall Street Journal;
(ii) the Trust will not engage in any Hedging Transaction based on
Treasury Bonds (other than Closing Transactions) which would cause the Trust
at the time of such transaction to own or have sold the lesser of (A)
outstanding futures contracts based on Treasury Bonds exceeding in number
50% of the quotient of the Market Value of the Trust's total assets divided
by $100,000 ($200,000 in the case of the two-year United States Treasury
Note) or (B) outstanding futures contracts based on Treasury Bonds exceeding
in number 10% of the average number of daily traded futures contracts based
on Treasury Bonds in the 30 days preceding the time of effecting such
transaction as reported by The Wall Street Journal;
(iii) the Trust will engage in Closing Transactions to close out any
outstanding futures contract which the Trust owns or has sold or any
outstanding option thereon owned by the Trust in the event (A) the Trust
does not have Standard & Poor's Eligible Assets or Moody's Eligible Assets,
as the case may be, with an aggregate Discounted Value equal to or greater
than the Municipal Preferred Basic Maintenance Amount on two consecutive
Valuation Dates and (B) the Trust is required to pay Variation Margin on the
second such Valuation Date;
(iv) the Trust will engage in a Closing Transaction to close out any
outstanding futures contract or option thereon in the month prior to the
delivery month under the terms of such futures contract or option thereon
unless the Trust holds the securities deliverable under such terms; and
(v) when the Trust writes a futures contract or option thereon, it will
either maintain an amount of cash, cash equivalents or high grade (rated A
or better by Standard & Poor's or Moody's, as the case may be), fixed-income
securities in a segregated account with the Trust's custodian, so that the
amount so segregated plus the amount of Initial Margin and Variation Margin
held in the account of or on behalf of the Trust's broker with respect to
such futures contract or option equals the Market Value of the futures
contract or option, or, in the event the Trust writes a futures contract or
option thereon which requires delivery of an underlying security, it shall
hold such underlying security in its portfolio.
For purposes of determining whether the Trust has Standard & Poor's Eligible
Assets or Moody's Eligible Assets, as the case may be, Initial and Variation
Margin will not constitute eligible assets. Segregated Securities will
constitute eligible assets, discounted at the factor equal to the exposure
period.
